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  • Curb your enthusiasm for stocks
  • Canadian dollar jumps
  • A Netflix TV screen I’d love to see
  • Markets at a glance
  • New York poised to open stronger
  • Air China, Air Canada in joint venture
  • Canadian, U.S. trade gaps shrink

Investors have acclimatized to Donald Trump’s ‘megaphone’ diplomacy

Ingvild Borgen Gjerde, Capital Economics

Ingvild Borgen Gdjere suggests you curb your enthusiasm.

The base case among many market players is that common sense will win out amid the threat of a full-scale tariff war.

That’s her base case, too, but don’t take it to the bank.

“Investors have acclimatized to Donald Trump’s ‘megaphone’ diplomacy,” Ms. Borgen Gdjere, markets economist at Capital Economics in London, said in a recent report.

“Despite the tariffs imposed by the U.S. on steel and aluminium imports from the EU, Mexico and Canada, investors presumably see it as a negotiating tactic, rather than the start of a full-blown trade war that could have serious ramifications for economic growth,” she added.

“Although we share this view, the risk of a trade war is greater now than it has been for many years. So at the very least, the risk ought to continue to curb investors’ enthusiasm for equities.”

Her comments came before Mr. Trump suggested breaking up NAFTA.

The European Union, Mexico and Canada have all drawn up lists of countermeasures to the Trump administration’s steel and aluminum tariffs, the latter planning to put them into effect in July.

Negotiations to remake the North American free-trade agreement have faltered. And, as The Globe and Mail’s Adrian Morrow and Greg Keenan report, Mr. Trump is now looking at breaking NAFTA apart and striking separate deals with each of Canada and Mexico, according to his chief economic adviser.

It’s not just the Canada, Mexico and the EU, either. China is a big target for the U.S., and the two countries are jockeying.

“With China attempting to stifle U.S. tariffs, we are clearly at a crucial juncture for global trade, despite the relative optimism seen throughout global financial markets,” said IG market analyst Joshua Mahony.

Brian Belski, for one, takes the calmer-heads-will-prevail view, and is one of the reasons the S&P/TSX Composite Index will drive higher, ending the year at 17,600.

“Although the TSX outperformed the S&P 500 in May, renewed concerns surrounding NAFTA saw the TSX start to underperform in the last week of the month and heading into June, as the U.S. levied steel and aluminum tariffs against Canada,” the chief investment strategist at BMO Capital Markets said Tuesday.

“Indeed, these negotiations are extending beyond what we had expected, however we continue to believe common sense will prevail and NAFTA will be renegotiated with the result generating a relatively minor impact on Canadian equities when all is said and done.”

Goldman Sachs, for another, expects that the “earnings-driven” bull market will continue apace, with the S&P 500 gaining 5 per cent to 2,850 by the end of this year.

This is playing out in the currency markets, too, where, for example, the Canadian dollar enjoyed something of a boost on an ABC News report saying Treasury Secretary Steven Mnuchin is pushing Mr. Trump to exempt Canada from the tariffs.

But “this can’t be considered a breakthrough or new news since Mnuchin is clearly a proponent of free trade, and in recent days/weeks his view has been undermined by none other than [Peter] Navarro and Trump,” said Sue Trinh, Royal Bank of Canada’s head of foreign exchange strategy in Hong Kong.

The loonie rose further after Canada’s monthly trade report.

Mexico’s peso, in turn, took a hit.

“Whilst the loonie popped higher on hopes of an exemption for Canada from the steel and aluminium tariffs, a retaliation from Mexico in a sharp escalation in the tit-for-tat trade war over tariffs, and an increasingly elusive NAFTA agreement, sent the peso to a 15-month low,” London Capital Group analysts said in their morning note to clients.

“Mexico responded to the U.S. metal tariffs, with retaliatory tariffs on a wide range of U.S. agricultural products including pork, cheese and apples,” they added.

“The moves are expected to ramp up trade tensions, making any agreement on NAFTA unlikely before the Mexican election this summer.”

This comes just ahead of the G7 summit in Quebec, where Mr. Trump will be pounded by his peers amid the mounting trade tensions.

“There are also appears to be some nervousness over this week’s upcoming G7 meeting and the prospect of some form of agreement on tariffs, with some concern that we may not get any progress this weekend,” said CMC Markets chief analyst Michael Hewson.

“This raises the prospect of an extended period of uncertainty and whether investors are right in their belief that this is part of a strategy by President Trump to keep everyone off balance until stepping back at the last minute.”

This idea that common sense at the trade bargaining tables will prevail is actually just one of three reasons Ms. Borgen Gdjere is ringing alarms over the continued gains in the market.

“None of them, however, is especially reassuring,” she said.

The second reason is the easing of tensions in Italy, where bond yields settled down after a new government took power.

“But while the government sworn in by the president on Friday was arguably more market-friendly than many might have feared, we don’t think that Italy’s problems are over, and expect yields there to rise once more in due course,” Ms. Borgen Gdjere said.

“If we are right, global equities will probably come under pressure again.”

Her third reason relates to economic indicators, the latest on employment and manufacturing coming in better than expected.

“Although growth in the U.S. economy is likely to remain healthy this year, we think that it will falter in 2019 as monetary tightening bites and fiscal stimulus fades,” Ms. Borgen Gdjere said.

“Growth is also likely to slow elsewhere, if not as rapidly,” she added.

“This is significant because the rally in global equities since mid-2016 has been mainly driven by an upturn in the global economy. The upshot is that we doubt that the recent rebound in global equities will continue.”

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