President Donald Trump has reinstated tariffs on steel and aluminum exports from Argentina and Brazil, leaving global financial markets wondering what that means.
At best, the move is based on mis-understanding by the White House of how exchange rates work. The justification that President Trump offered for reimposing the tariffs is that “Brazil and Argentina have been presiding over a massive devaluation of their currencies, which is not good for our farmers,” Trump said in an early morning tweet. Of course, Brazil and Argentina haven’t exactly been “presiding” over anything in the financial markets and the plunge in the real and the peso is a market reaction to political, economic, and monetary chaos in those countries. Nobody wants to hold those currencies because the government budgets in both countries threaten to spiral out of control–again.
At the worst, and this is what markets fear, the hike in tariffs on Brazilian and Argentine steel and aluminum is a prelude to renewed tariffs on China exports born out of belief in Washington that putting more pressure on the Chinese will result in either a more favorable Part 1 trade agreement or a face-saving occasion for ending talks that have stretched on for too long according to the U.S. President.
(It’s also possible that Trump is looking for another scapegoat of the pain his tariffs have inflicted on farmers and hence the attempt to tie these tariff moves to a desire to help U.S. farmers in some unspecified fashion.)
U.S. stocks weren’t panicked by the move–the market by now has built in a sizable “It’s just Trump being Trump” margin into its prices that may come back to haunt investors and traders on the day when the President’s tweets add up to as big shift in policy. As of 3 p.m. New York time the Standard & Poor’s 500 was off 0.60% and the Dow Jones Industrial Average was down 0.69% or 194 points after having been lower by 250 points earlier. The NASDAQ Composite was down 0.94% and the Russell 2000 small cap index was lower by 0.94%. The iShares Emerging Markets ETF (EEM) was off only 0.11%.
The relatively restrained drop in emerging markets signals, in my opinion, that global markets weren’t especially rattled by today’s tariff move. Oil also demonstrated a lack of concern by rallying 1.58% for West Texas Intermediate to $56.04 a barrel and 0.81% for international benchmark Brent to $60.98 a barrel.
Gold was lower by 0.31% to $1468.10 an ounce and silver fell by 0.77% to $19.98 an ounce.
The dollar was lower with the Dollar Spot Index (DXY) down 0.39%.