U.S. President Donald Trump’s escalating trade wars are taking a toll on investors around the world. Except in one place: the U.S. itself.
Trade hostilities took another turn in an ugly direction last week: the United States and China engaged in a fresh round of competing tariffs, and negotiations in Washington again failed to deliver a new version of the North American free-trade agreement.
The International Monetary Fund, among others, has warned that the trade disputes will soon begin to put a dent in global growth, and equity markets are responding. Most major euro zone stock indexes are down over the past three months; China’s markets have taken a sharp hit this year, with the Shanghai composite down more than 15 per cent.
In Canada, the S&P/TSX Composite Index has lost 343 points, or more than 2 per cent, since July 12, as the NAFTA discussions drag on. Ottawa and Washington appear to be stuck on issues of auto tariffs, U.S. access to Canada’s market for dairy products and how to resolve future trade disputes.
Yet, U.S. stocks continue to rise, virtually interrupted, to record levels, despite all of the trade heat. “Markets certainly have decided the U.S. won the trade war so far,” said Ben Emons, chief economist at Intellectus Partners.
Nearly every major stock market around the world has some downside attributable to trade tensions emerging from Mr. Trump’s protectionist agenda, according to a recent UBS report.
The analysts isolated the trading days this year when there has been a “trade shock” – defined as days when the pool of stocks most exposed to trade tensions diverges significantly from the broader market. There have been at least 24 such days since March.
For example, on days when new tariffs are announced, such as when the United States and China imposed levies last week covering US$260-billion in two-way trade, the stocks of companies that do a lot of business overseas are most vulnerable. This includes sectors such as materials companies and auto makers. On the other hand, domestic-focused industries such as utilities and telecoms tend to be relatively insulated.
UBS compared the trading patterns of trade-exposed stocks to the rest of the market to estimate the impact of trade tensions on global equity indexes.
The biggest loser so far is China – Mr. Trump’s primary tariff target – whose main national stock index has suffered a 12-per-cent hit as a result of the trade war, according to the team of UBS analysts led by strategist Vassili Serebriakov.
Canadian losses are in the middle of the pack, with 6 per cent of downside seen so far this year in trading up to mid-September, UBS said.
The drag on emerging-market equities amounts to 9 per cent, and for European stocks, 8 per cent.
Meanwhile, the No. 1 U.S. benchmark, the Standard and Poor’s 500 Index, has risen by 6.3 per cent in the past three months alone.
U.S. stocks haven’t been entirely immune to tariffs, with UBS estimating the negative impact on the S&P 500 at about 3 per cent so far this year.
“U.S. equities are pricing in little trade impact at the moment, and could be vulnerable should tensions escalate,” the bank said in the report.
But Mr. Trump’s approach, despite the economic uncertainty it fosters, is not generating much in the way of cautionary signals from U.S. stocks, David Rosenberg, chief economist at Gluskin Sheff + Associates Inc., said in a note. “The stock market likes what it sees, and we clearly have a president who measures success based on the direction of the S&P 500.”
Canadian stocks, while bearing the wounds of the trade war, could be poised to jump if the federal government is successful in getting some kind of NAFTA agreement soon.
“If Canada comes onside, we would expect a relief rally – largely regardless of the terms of the [trade] deal,” Ian de Verteuil, head of portfolio strategy for CIBC World Markets, said in a report.
“Unfortunately, this will likely be short-lived,” Mr. de Verteuil said. With a new trade deal sure to reduce Canada’s level of access to the U.S. market, and with the advantage of lower Canadian corporate taxes having recently vanished, “U.S. equities will likely continue to outperform Canadian equities.”