US Trade Deficit, Market Cap Surplus… Is the World Ready for This?
Key Takeaways
- US equity markets dropped about 1.2% Friday afternoon (losing about $750 billion) after confirmation that the US would impose 25% tariffs on Mexico and Canada and 10% on China (also the rate for Canadian petroleum exports). At a low point Monday morning, US equities were down another 2% and more in futures markets overnight.
- News that an agreement may have been reached between the US and Mexican Presidents on border controls this morning — pushing off the tariffs for a month — has raised hopes that a Colombia-style set of accommodations can be made. Equities have recovered some following these headlines, trading off just 0.7% as we write.
- In his first election, Trump promised to build a border wall that Mexico would pay for. Tariffs — which US importers pay — may be one way he sees this being financed by Mexico. Even if concessions are now found, it seems the administration is moving more strongly toward the idea that tariffs can be a much larger source of Federal revenue. The financial market and consumer response to tariffs will play some in determining how well this works.
Potential Portfolio Implications
- Compared to the news-driven drop of $750 billion for the US on Friday, Canada and Mexico’s equity markets lost the equivalent of about $35 billion USD in response to the same news. This is even as Mexico and Canada’s economies may lose much more from the higher cost of goods sold in the US. As our CIO Bulletin notes, the US runs a trade deficit, but it also runs a market cap surplus. This is one measure of US vulnerability to trade wars.
- Tariff threats as leverage for a variety of US policy interests — and some lasting increase in tariffs — is nearly certain to be part of the outlook for the world economy. The US’s closest trading partners, including Europe, have more to lose from this. We’ll have to manage our portfolio risks accordingly.
See our weekly CIO Strategy Bulletin for more details