The Daily Prophet: Dalio Blows Tariff Tantrum Narrative Apart

Connecting the dots in global markets.

Cooler heads will prevail. That’s the message markets sent on Monday after investors spent much of the weekend pondering whether President Donald Trump really wants to incite a trade war by slapping tariffs on steel and aluminum. Ray Dalio, who runs the world’s largest hedge fund at Bridgewater Associates, captured the sentiment best when he wrote on his LinkedIn page Monday, “I believe that what is happening now is more for political show than for real threatening."

The Dow Jones Industrial Average rose more than 300 points and the S&P 500 Index jumped more than 1 percent, erasing all of its losses that began on Thursday, when Trump blurted out at a meeting of steel executives that he would impose a 25 percent tariff on imported steel and a 10 percent tariff on aluminum. Although Trump on Monday said he won’t retreat from his plan to impose the tariffs, he doesn’t have the support of his fellow Republicans, which investors speculate may be too much of a hurdle for Trump. A spokeswoman for House Speaker Paul Ryan said in a statement, “We are extremely worried about the consequences of a trade war and are urging the White House to not advance with this plan. The new tax reform law has boosted the economy and we certainly don’t want to jeopardize those gains.” Ryan of Wisconsin has supported Trump even in some of the most controversial moments of his presidency, according to Bloomberg News’s Anna Edgerton.

“The positive story today is the lack of anything bad happening,” Kevin Caron, a senior portfolio manager as Washington Crossing Advisors, told Bloomberg News. “The bad news would have been if [Trump] announced more tariffs, or if there was some kind of reciprocal action from another country.”

Three cheers for the lowly Treasury bill. At the government’s auction of $51 billion in three-month bills Monday, investors submitted bids for 3.26 times the amount offered. That’s the highest so-called bid-to-cover ratio for that maturity since mid-August. Although on the surface a 1.66 percent rate doesn’t seem all that attractive, it’s downright juicy considering that is higher than the rates investors are accepting to lend for five years to the governments of Switzerland, the Netherlands, Germany, France, Sweden, Spain, Portugal, Italy, the U.K. and Japan. U.S. government debt auctions are becoming even more important than usual now that the government is forecast to at least double its debt sales this year to more than $1 trillion, the most since 2010, to fund a growing budget deficit brought on by the tax reform. Any signs that the U.S. is having trouble attracting demand at its debt auctions could have wide-ranging implications, likely causing the dollar and equities to tumble. A class of bidders largely considered to include foreign central banks and investors bought 50.6 percent of the offering, above the average of 37.9 percent over the past year.

Canada’s dollar bore the brunt of Trump’s tariff threats, losing value not only against the U.S. dollar but also against Mexico’s peso. Thanks to two interest-rate increases by the Bank of Canada, the nation’s currency surged about 12 percent against the peso in the second half of 2017. This year the tables have turned, with the loonie dropping about 9 percent against its fellow North American Free Trade Agreement partner. On Monday, Trump said the U.S. won’t lower tariffs on steel and aluminum from Mexico and Canada unless the two countries agree to a revamped Nafta that’s fair to the United States. Canada, the biggest supplier of steel and aluminum to the U.S., and Mexico, the No. 4 source of steel, have asked to be excluded from Trump’s proposed tariffs, and both indicated they will strike back if Trump includes them in the stiff duties, according to Bloomberg News’s Eric Martin and Andrew Mayeda. At a recent 14.5249, the Canadian dollar-Mexican peso exchange rate is getting close to where it’s likely to see some support, according to the currency strategists at Brown Brothers Harriman. They say a level of 14.35 to 14.40 is probably where the Canadian dollar is likely to see support.

Investors didn’t take well to the news that Italy’s populist parties -- the anti-establishment Five Star Movement and a center-right coalition led by the anti-migrant League -- both claimed the right to lead the next government after Sunday’s election. Now, parliamentary gridlock promises weeks or even months of negotiations and maybe even a repeat vote, according to Bloomberg News’s Lorenzo Totaro and Thomas Gualtieri. Italy’s benchmark FTSE MIB stock index closed down 0.42 percent, trimming losses after falling as much as 2.1 percent, while other European equities jumped higher. The yield on 10-year Italian government notes rose as much as seven basis points, before paring that to three basis points at 2.00 percent. “The underperformance in Italian bonds is fairly contained for now,” Martin van Vliet, a senior interest-rate strategist at ING Groep, told Bloomberg News. “The market is not really panicking as many believe a coalition between the Five Star Movement and League is a small tail risk. But I just struggle to see how this election outcome can be positive for Italian bonds. There is a real risk of new elections six months down the line.” Van Vliet said it was possible for the gap between 10-year German and Italian yields to widen from 136 basis points toward 150 basis points in coming days, according to Bloomberg News’s Anooja Debnath.

Zinc is one of the unsung heroes of the commodities market, usually used as a protective coating for iron steel. Far from being a sleepy market, zinc shot up over the past two years, surging some 75 percent in price. Now, however, zinc is in retreat. Prices have tumbled 8 percent since a peak in mid-February, and the losses deepened Monday as data from the London Metal Exchange showed the biggest increase in inventories in almost three decades, according to Bloomberg News’s Mark Burton. Declining inventories were a big factor driving up prices, as LME stockpiles shrunk by more than 80 percent over the past five years. The zinc market had been extremely tight in recent months, meaning that it’s difficult for suppliers to access metal. Global inventories are at depressed levels, and LME warehouses in Asia and Europe are almost out of metal, Barton reports. New Orleans holds more than 99 percent of all zinc in the exchange’s warehouse network, but high shipping costs mean it’s unlikely for that metal to reach manufacturing centers outside the U.S.

It’s a big week for major central banks, with no fewer than four monetary policy meetings on tap. That means there’s the potential for higher-than-normal volatility. First up is the Reserve Bank of Australia, which is expected to announce in a few hours that it’s keeping benchmark interest rates unchanged at 1.50 percent. Doubts have been growing in Australia about household finances, which are straining under record debt and stagnant wages, according to Bloomberg News’s Michael Heath. The Bloomberg Correlation-Weighted Index for the Australian dollar, which measures the currency against nine developed-market peers, dropped on Monday to its lowest level since September 2016. Up next is the Bank of Canada on Wednesday, followed by the European Central Bank on Thursday and the Bank of Japan on Friday.

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