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Inside the Market 5 ways trade tensions will ‘snuff out’ an economic recovery in 2019

A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web

Equity markets were refreshingly strong Tuesday, but Morgan Stanley’s Chetan Ahya, the company’s head of global economics, still believes trade tensions have already dashed hopes for a global economic recovery in 2019,

“Re-emergence of trade tensions has snuffed out the prospects of a recovery in global growth in 2H19 …Five channels will transmit trade tensions to global growth. First, implementing the tariffs will increase costs. Companies may not be able to fully pass on higher tariffs, which will erode profitability. Consumers, facing higher prices, may pull back on demand. Second, the tariffs’ impact will spill over into the domestic and global supply chains and consequently global trade flows. Third, over the medium term, multinational companies will incur additional costs as they develop alternative supply sources. Fourth, global corporate confidence will take a hit, and companies will pull back on capex, which will weigh on aggregate global demand. Finally, corporates with global footprints will face additional downward pressure on growth and profitability from their international operations… the latter two channels, which actually have a greater impact, seem under-appreciated.”

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“@SBarlow_ROB MS: 5 ways trade tensions will translate into slower growth for 2019” – (research excerpt) Twitter

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Robert Colangelo of rating agency DBRS has a lot more faith in the outlook for domestic banks than hedge fund manager Steve Eisman,

“Canadian banks are well positioned deal with the credit cycle … banks are growing their earnings which gives them a bigger buffer.”

Mr. Colangelo emphasized that DBRS is not, unlike hedge fund managers, concerned with the banks stock prices but he believes we are still in a benign credit environment where the diversification of bank businesses is mitigating risks from household debt and commercial lending operations.

“Canadian banks are well-positioned to deal with a credit turnover: DBRS” – BNN Bloomberg (video, starting at 3:30 mark)

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Bank of Montreal economist Alex Koustas believes that North American automakers will be unable to adjust profitably to full Mexican tariffs,

“If tariffs on Mexican imports were to scale up to the proposed maximum threshold of 25%, manufacturers would be unable to bear the brunt of the costs … We estimate that U.S. vehicle prices would rise by $1000-$1500 on average (assuming the cost is spread across the fleet), which would dent demand by roughly 400,000 to 600,000 units; enough to trigger job losses at U.S. auto plants.”

“@SBarlow_ROB BMO: "If tariffs on Mexican imports were to scale up to the proposed maximum threshold of 25%, manufacturers would be unable to bear the brunt of the costs " – (research excerpt) Twitter

“Mexican officials hope to avert U.S. tariffs in last-ditch talks’ – Reuters

“The next round of trade tariffs could be the tipping point into crisis” – Bloomberg

“ McConnell says 'not much support' for Mexico tariffs among U.S. Republicans” – Reuters

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“The Global Economy: Heightened Tensions, Subdued Growth” – World Bank

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Tweet of the Day:

Diversion: “Views From Above: The Past Eight Months in Orbit” – The Atlantic

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