It is all about Trump
By Alfred Lam, CFA Senior Vice-President and Chief Investment Officer, Multi-Asset Management
U.S. President Donald Trump has been busy lately, imposing tariffs on imported steel and aluminum for all countries, targeting Chinese imports for punitive tariffs and adding sanctions on Russia, Iran and Syria. The intention of these significant events was to restrict free trade, but they are unintentionally causing prices to rise and harming relationships between countries. Investors initially believed President Trump was bluffing but as he adds more items and countries to his list, many are now convinced this is not the case.
Thus far, the victims have been China, Argentina, Turkey, and to some degree, Canada and Mexico. China has been hit with tariffs on tens of billions of its exports to the United States. China’s local stock markets have lost over 20% from this year’s peak and its currency, the yuan, has also depreciated against the U.S. dollar. Argentina had a credit and currency crisis that required a bailout by the International Monetary Fund (IMF) with a record $50 billion credit facility. Argentina borrowed significantly in U.S. dollars and was penalized as the loans in its local currency (peso) ballooned as the U.S. dollar appreciated. Turkey has an unsustainable social welfare system and the sanctions have magnified the problem. Investors have lost faith as the Turkish government is ignoring the issues. Its currency, the lira, is depreciating, driving a rapid rise in inflation. The United States, Canada and Mexico have been significant trading partners through the North American Free Trade Agreement (NAFTA) dating back to 1994. A renegotiation was initiated by President Trump over a year ago but no progress has been made. The renegotiation has created some overhang in both the Canadian and Mexican economies, resulting in stagnant stock prices and weak currencies for both countries.
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