If one fairy tale figure summed up financial markets at the start of 2018, it was Goldilocks. Global growth looked to be synchronised, the appetite for equities was strong and inflation was both containable and not too hot. Just right.
In the last month, Papa Bear and Mama Bear have been wrestling for the title of most apt economic metaphor. The backdrop has been decidedly bearish, not much of a fairy tale, and dominated by the threat of a global trade war.
As we prefaced before their announcement, the spark was lit by US tariffs on imports of steel and aluminium. Ostensibly to curb alleged dumping of Chinese product on global markets, it soon became apparent that the duties would apply equally to close trading allies, tearing at the fabric of global trade.
Tit-for-tat threats and pleas ensued, and resulted in large exceptions when the steel and aluminium tariffs were signed into law last week by President Donald Trump. In the end, Argentina, Australia, Brazil, South Korea, Canada, Mexico and the European Union were all given a breather until at least 1 May, but just as this compromise was reached, Mr Trump unveiled plans to target up to $60bn-worth (£43bn) of annual imports from the People’s Republic.
The president said the tariffs were designed to make the US “a much stronger, richer nation”, and help address the country’s $375bn annual trade deficit with China. The Financial Times reported that the tariffs would focus on high-tech industries identified by President Xi Jinping’s “Made in China 2025” plan, such as robotics, aerospace and rail equipment and electric vehicles.
As Chinese officials hit back at the accusations and promised retaliatory measures, leading stock indices around the world dropped, and financial safe havens like the yen and gold spiked. In the five trading sessions to the 23 March, the FTSE 100 lost 3 per cent, while the Shanghai Composite Index and S&P 500 dropped 5 and 6 per cent, respectively.
Throughout, miners have been at the sharp end of these events. Sentiment towards the metals sector has not only been dampened by the ructions in aluminium and steel markets, but because of its heavy exposure to (and reliance on) Chinese demand. Any dent to the country’s economic outlook has a disproportionate effect on its commodity consumption, which partly explains why the FTSE 350 Industrial Metals Index (NMX1750) dropped more than 5 per cent last week.
By the time this magazine went to press, the worst of these fears were starting to subside. US Trade Secretary Steve Mnuchin (pictured) went on to Fox News to say he was “cautiously hopeful” that negotiations would result in an agreement that would open Chinese markets to US companies, and avert the need for the tariffs. “We are working on a pathway to see if we can reach an agreement as to what fair trade is for them to open their markets, reduce their tariffs and stop forced technology transfer,” said Mr Mnuchin.
Reportedly, the climbdown has involved Chinese pledges to divert purchases of semiconductors from South Korea and Taiwan to the US, a reduction in tariffs on foreign-made cars and a scramble to approve new regulations permitting foreign financial groups' ownership of Chinese companies.
