“As history has repeatedly proven, one trade tariff begets another, then another – until you’ve got a full-blown trade war. No one ever wins, and consumers always get screwed” – Mark McKinnon
Canada, U.S. Impose Tariffs On One Another
Thursday saw volleys of trade tariffs imposed. Citing “national security”, United States Commerce Secretary Wilbur Ross and President Trump tariffs on imported Canadian steel and aluminum worth about $20 billion, taking effect today (June 1). President Trump also threatened to impose an auto tariffs.
Canadian Foreign Affairs Minister Chrystia Freeland and Prime Minister Justin Trudeau responded only hours later, announcing tariffs of up to $16.6 billion on a wide assortment of U.S. products to take force on July 1.
Tariffs always hurt the end consumer, and they can also hurt market growth. Companies that pay tariffs on imported goods will, to the extent they can, pass the cost on to the end consumer. For instance, tariffs on aluminum could lead to a rise in the production cost of beer cans, and thus, the cost of purchasing beer at the till.
Higher costs over time will put upward pressure on inflation. One option a central bank can employ to counter inflation is to raise their key interest rate. Rising rates drag on market growth and reduce credit availability, leading to lowered returns.
About 75 per cent of Canadian exports go to the U.S., so the beleaguered Canadian economy could be hurt even further.
Bank of Canada Holds Rates Steady
On Wednesday, the Bank of Canada opted to hold its key interest rate at 1.25 per cent, as analysts had expected. However, cautious wording during the previous rate hold were not present this week, signalling a rate hike at the July policy meeting.
The new tariff war between Canada and the U.S. will likely only add to the expectation of a rate hike, as inflation, a natural by-product of tariffs, could be kept in check with rising rates.
Increased borrowing costs for businesses and individuals alike will weigh on the Canadian economy. Canadians already have high levels of household debt, so discretionary spending is likely to decrease – never a good sign for an economy.
Italian Political Chaos
Italy’s “anti-establishment” parties’ plans to form a coalition government fell apart, as the President refused a controversial choice for Economic Minister. Now, the possibility of a snap election has arisen. Markets reacted by putting Italian bonds and specific equities, like bank stocks, under heavy selling pressure.
Italy is a top-5 bond market in the world, so a bond market disruption would have a ripple effect worldwide. Some analysts feel the European Central Bank should steer clear of this, while others feel they should announce their intention to purchase all Italian bonds, should yields hit a certain level (effectively, a yield cap).
Those in favour of ECB intervention feel that simply announcing the intent to put a yield cap on Italian bonds will help calm the waters. It is likely still too early for the ECB to step in, and until they do, investors will likely seek safer, less volatile bond markets around the globe.
Weekly Market Wrap-Up
- The TSX closed at 16044, down -32 points or -0.20% over the past week. YTD the TSX is down -1.02%.
- The DOW closed at 24635, down -118 points or -0.48% over the past week. YTD the DOW is down -0.34%.
- The S&P closed at 2735, up 14 points or 0.51% over the past week. YTD the S&P is up 2.28%.
- The NASDAQ closed at 7554, up 120 points or 1.61% over the past week. YTD the Nasdaq is up 9.43%.
- Gold closed at 1298, down 15.00 points or -0.69% over the past week. YTD gold is down -0.92%.
- Oil closed at 65.75, down -2.13 points or -3.14% over the past week. YTD oil is up 8.82%.
- The USD/CAD closed at 0.77185, up 0.0008 points or 0.10% over the past week. YTD the USD/CAD is down -2.95%.
- The MSCI closed at 2093, down -18 points or -0.85% over the past week. YTD the MSCI is down -0.48%.
- The Euro Stoxx 50 closed at 3449, down -66 points or -1.88% over the past week. YTD the Euro Stoxx 50 is down -1.57%.
- The FTSE closed at 7702, down -28 points or -0.36% over the past week. YTD the FTSE is up 0.18%.
- The CAC closed at 5466, down -77 points or -1.39% over the past week. YTD the CAC is up 2.88%.
- DAX closed at 12724, down -214.00 points or -1.65% over the past week. YTD DAX is down -1.50%.
- Nikkei closed at 22171, down -280.00 points or -1.25% over the past week. YTD Nikkei is down -2.61%.
- The Shanghai closed at 3075, down -66.0000 points or -2.10% over the past week. YTD the Shanghai is down -7.02%.
- The 10-Yr Bond Yield closed at 2.9, down -0.0300 points or -1.02% over the past week. YTD the 10-Yr Bond Yield is up 20.83%.
Sources: Dynamic, Advisor.ca