Jan. 5, 2017 (Commerzbank AG) – The risk of a trade war
President Trump wants to put an end to the allegedly unfair treatment of the US economy in global trade and reduce the foreign trade deficit. However, the Republicans’ destination-based cash flow tax is too complicated, and broadly-based import tariffs directed against China would be hazardous given that China can retaliate. In our baseline scenario, this culminates in trade policy skirmishes without breaking into a full-blown trade war, even though the risk of an escalating trade dispute has increased recently. Trump apparently sees international trade as a zero-sum game and is therefore likely to act tough to gain advantages for the US.
Outlook for the week of 6 to 10 February 2017
- Economic data: December data from the German manufacturing sector are likely to come in on the weaker side due to distortions resulting from the timing of the Christmas holidays. However, this should not be interpreted as a sign of renewed weakness, since business sentiment has remained healthy until recently.
- Bond market: Euro area bond markets are at a crucial crossroads as the renewed focus on elections and US policy risks compound the pressure from rising inflation. Some headwinds will fade over the coming weeks, but this should only make an impact once 10y Bund yields have climbed above the pivotal 0.50% mark.
- FX market: The US government is talking the dollar down. Although it is not certain that it will be successful over the medium-term, this departure from traditions practiced for decades suggests that the recent USD weakness will continue near-term.
- Equity market: Despite individual exceptions, the Q4 2016 results and 2017 outlooks released in the current reporting season have been convincing so far. Consequently, analysts are likely to make fewer downside revisions to their 2017 earnings expectations, which should provide additional support to the German equity market.
- Commodity market: Oil will not be able to hang to its recent gains for long as it becomes evident that the supply-side shortfall in the wake of production cuts is not as great as first assumed. On the base metal markets, lower Chinese copper imports in January are likely to hit sentiment whilst gold continues to respond to dollar fluctuations.