Markets edge lower as NAFTA talks resume

NAFTA talks recommence on Wednesday as Trump seeks pre-midterm victory

As we head into the business end of the week, markets are trading with a slightly negative tone as traders turn their attention back to NAFTA talks and a potential announcement on Chinese tariffs.

Canada and the US are set to resume talks on Wednesday in an effort to bridge the divides that still exist on NAFTA and prevent the 24-year old deal being terminated by President Donald Trump, as he has threatened to do if the renegotiation isn’t successful. The two sides had hoped to come to an agreement by the end of last week, handing a big victory to Trump ahead of the mid-terms as he seeks the backing of the American people for his hard-line approach to trade talks.

Trump has threatened to tear up the agreement and replace it with a bilateral deal with Mexico is Canada doesn’t agree to the concessions that the US is demanding, which would likely be damaging for both countries should Congress support the decision, but prove to everyone else that he isn’t bluffing. That obviously isn’t the desirable outcome but as long as others believe it’s on the table, he may well draw at least some of the concessions he’s looking for.

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Investors prepare for new Chinese tariffs this week

Trump could also announce that the US will impose 25% tariffs on another $200 billion of Chinese imports over the next day or two, a move that has been criticized by many but seen by the President as being necessary to address the deficit problem that has existed for years. Trump may have been aiming to get NAFTA over the line ahead of the mid-terms but I think he’s in this one for the long run and the Chinese don’t appear to be in any mood to back down, even if they aren’t able to respond with the same volume of tariffs.

The trade conflict between the two largest economies has been a primary reason behind the markets struggling to make major gains this year, despite companies reporting more than 20% earnings growth. Investors are clearly concerned about the economic downfall from engaging in a long-term trade war with China and others which has stalled the rally this year. That said, the S&P 500 is trading back at all-time highs despite the correction earlier in the year so I doubt Trump is too concerned at the moment. A repeat of the sell-off earlier this year and to a greater extend may get his attention though.

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New book another embarrassment for the US President

Trump will be more concerned with other stories circulating around the White House right now, with a new book from journalist Bob Woodward attracting plenty of attention right now and filling the Twitter feed of the President. While the so-far reported stories are more humiliating for the President at the moment, rather than being potentially damaging – as in the case of the Mueller inquiry – it does just draw more negative attention to the White House and Trump and should more significant stories emerge, could prove costly further down the line.

On the economic side, traders will be paying close attention to the data heading into the end of the week, with the jobs report on Friday being the standout release. Today though it’s the Canadian rate decision that will be of most interest, with the Bank of Canada seen holding at 1.5% having already hiked twice this year, the most recent coming at the last meeting in July.

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Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.