A Warning for All Traders   Trading Trump’s Tariff Market

Traders Beware of Trading in President Trump’s Tariff Market

A Warning for All Traders   Trading Trump’s Tariff Market: Timely suggestion to all the traders out there:

President Trump’s imposition of 25 % tariffs on imports from Mexico and Canada (10% on energy  starting  Feb 18) plus 10% on goods from China has sent shockwaves through the global trading community. There was hope he would use the threat of tariffs to exact concessions but instead he has carried through on his threats.

There is a good analogy to be made with currency intervention The threat, otherwise known as verbal  intervention, is often a greater deterrent than the action itself.

With both Canada and Mexico likely to retaliate with tariffs of their own,  a trade war, which benefits neither side, is looming in the short run.

More Questions Than Answers

This raises more questions than answers as to what is President Trump’s  endgame.

Is he looking to punish Canada and  Mexico for running trade surpluses with the U.S.?

Is the goal to replace the United States-Mexico-Canada Agreement (USMCA) free trade agreement with one more favorable to the U.S.?

Is he looking, as he says, to tighten the border to restrict illegal immigration and prevent fentanyl from being smuggled into the U.S.?  If true, punishing Canada the same as Mexico does not seem to make sense.

Fentanyl is primarily smuggled into the U.S. through the southern border, though there are cases of smuggling across the northern border as well. Most illicit fentanyl comes from clandestine labs in Mexico, where cartels manufacture the drug using precursor chemicals often sourced from China (ChatGPT) (ChatGPT)

Is this a prelude to a similar threat the EU, which is in Trump’s tariff hit list?:

Trader’s Perspective

I will leave the answers to the political pundits. As a trader I am looking for what will be the fallout in bonds (higher inflation), stocks (weaker growth) and forex (which currencies benefit and which are hurt).

Of the three, bonds would seem to be the key market in the long run but a sharp fall in stocks would likely capture the attention of President Trump. In the past, he has viewed equities as an indicator of the economy and susccess of his policies. In addition, the reaction in stocks is likely to be a focus of major news reporting.

A Warning for All Traders

This is not a normal situation.

A trade war, while the focus in the short run, is not sustainable in the medium or long run, especially given the close economic connection of North American economies. .

However, it pays not to look too far ahead until the eventual endgame gets factored into markets. It feels, as I wrote, like a giant game of Hot Potato until the music stops.t

There is an old trading adage that is worth repeating: Markets can remain irrational longer than a trader can remain solvent.

In the meantime, there is likely to be a neverending stream of headlines as this soap opera plays out. In a market already hyper sensitive to news. President Trump’s endless words and social media posts are likely to see bursts of volatility around news headlines.

So, my warning to traders is to tighten seat belts, not treat this as a typical market, keep it closer to the vest (e.g. stick to the short term ) and get access to a good news source (e.g. Newsquawk,com) so you will be in touch with whatever headline is triggering a reaction.

Winners vs Losers

My feeling is a trade war is in no one’s interest but it is hard to predict the eventual outcome until President Trump’s ulterior motive in triggering one becomes clear..

However, I have observed that President Trump tends to look at negotiations as being a battle between losers and winners. While logic says a prolonged trade war is in neither side’s interest, President Trump will not seek a resolution until he sees the U.S. as the winner. .

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