US tariffs rattle markets, exporters warn of retaliation

Farr, Miller & Washington president Michael Farr says “Protectionism is not a good thing, and the ramifications for this could be significant.”

Financial markets face another turbulent week as they absorb the implications of a global response to US tariff hikes on steel and aluminium.

The Dow Jones Industrial Average, which includes several big manufacturing, machinery and chemical companies that would suffer from higher metal prices, closed 0.3% lower on Friday after a 1.7% decline the day before.

A late rebound on Friday afternoon after a sharp opening decline eased some worries the tariffs may signal the start of a broader protectionist trade policy that could eventually include other commodities and products.

“Protectionism is not a good thing, and the ramifications for this could be significant,” says Michael Farr, president of money-management firm Farr, Miller & Washington. 

He said the stocks recovery in afternoon trading was encouraging but there was reason to remain wary.

“Starting a trade war would be reckless. I don’t think you can be sanguine talking about any war, even if it’s just economic. There will be suffering, there will be serious casualties.”

Some export-oriented US companies warned of the risks of retaliatory trade measures that could hurt their sales outlook as their share prices fell. Among the worst decliners was Boeing, which fell more than 1%, ending the week down 3.4%.

Italian elections
In addition to trade concerns, investors will scrutinise the results of the Italian elections at the weekend to gauge risks to the eurozone’s third-largest economy. The polls close this morning (NZ time).

In the US, fresh data due on Wednesday (Thursday NZ time) on the trade deficit will offer a view of the state of government finances, while the February jobs report, due Friday (Saturday NZ time), could shed light on wage growth and inflation trends.

JP Morgan Chase said nonfarm employment, after increasing by 200,000 in January, reached 225,000 last month. “Generally mild weather should support a solid outcome,” it says.

Away from the data, US Federal Reserve speakers on the calendar including governor Lael Brainard speaking on the economy and monetary policy on Tuesday (Wednesday NZ time).

Trade and growth concerns inject new uncertainty at a time when stocks are coming off their worst month in more than two years.

Inflation fear
Investors are already grappling with the threat of an economy expanding so quickly that the Fed may have to hasten its pace of interest-rate hikes to tame inflation.

Low interest rates have long been a justification for stocks’ lofty valuations, and investors say higher rates will make equities less attractive as borrowing costs and Treasury yields rise.

The Dow hit its all-time high of 26,616.71 on January 26 before suffering its first 10% decline, or correction, in nearly two years early last month. It fell 3% last week to 24,538.06.

The other benchmarks fared better. The S&P 500 rose 0.5% to 2691.25 and the Nasdaq Composite gained 1.1% to 7257.87, though they posted weekly losses of 2% and 1.1%, respectively.

Gold rose 1.4% to $US1321.10 a troy ounce but government bonds found little support. Yields on 10-year Treasurys rose to 2.855% from 2.802% on Thursday.

In Europe, the Stoxx 600 Index closed the week with a 2.1% plunge. In Germany, where members of the Social Democratic Party backed Chancellor Angela Merkel’s “grand coalition” by a two-to-three margin, the DAX fell 2.3%.

Italy’s FTSE MIB dropped 2.4% ahead of the election on Sunday. The UK’s FTSE 100 fell 1.5% and France’s CAC 40 fell 2.4%.

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The sooner Trump is ousted, the better. He is a self interested bully and has no sense of economic history whatsoever. If his advisers did some research they would know the Great Depression of 1929 was marked by an outbreak of protectionist trade policies. Governments around the world imposed tariffs, import quotas, and exchange controls to restrict spending on foreign goods. Asia and Europe must not buy into it and stick to free trade approach with each other. American goods will attract higher tariffs.

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So you believe Comalco is producing aluminium in Southland completely free of Government assistance/subsidy?

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You know the answer to the question you are asking. But domestic support measures, whilst expensive for the taxpayer, are less detrimental to world trade than the full protectionist offering of external tariffs and quotas and related measures hindering trade flows. In the end free trade allows comparative advantage to prevail, and those who defy that trade rule will make us all pay the price including the house construction sector - especially in the US.

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You are suggesting that "domestic support measures" do not "harm/hurt" other manufacturers of aluminium?
Also you seem you be suggesting that Comalco cannot, as a consequence of "domestic support" undercut other suppliers of aluminium ingots to processors of finished aluminium products?

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To the contrary, domestic support measures are expensive as stated and I did not say they do not hurt other manufacturers, for plainly they do. But it is worse when industrial protectionism is applied at the border - the point I was trying to make. You are informed on Comalco, so feel free to elaborate on their subsidy for other readers if it helps.

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Thomas Sowell argues “there was no Great Depression until AFTER politicians started intervening in the economy.”
However foreign trade was too small a part of America’s economy in 1930 to have enabled Smoot-Hawley – as ill-advised as it unquestionably was – to be a major factor in deepening and prolonging the Great Depression.

From Don Boudreaux;
"A far worse government failure than Smoot-Hawley was the “Great Contraction” – the Federal reserve allowing the money supply to fall by one-third between 1930 and 1933. And, following this calamity, an even more destructive curse descended on America: FDR’s New Dealing hyperactivity in which his Trusted Brains cartelized industries, destroyed agricultural products, attempted artificially to raise prices (in the wake of the Great Contraction, no less!), launched entirely new regulatory agencies headed either by Geniuses or by cronies, spent and ran up government debt orgiastically, pumped labor unions with more arbitrary power to behave monopolistically, and demonized entrepreneurs and industrialists."

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Excellent Sir.
But, with respect, Adam Smith "trumps" both your gentlemen.

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I have not read much on the Scottish enlightenment (i am an offset printer not an economist) but will put this on my to do list, thank you for the tip

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No foreign company in their right mind will call it quits on this $20 trillion economy because of some measly tariffs. Do not underestimate their crafty tax consultants and management accountants. Instead these companies will strategically move their production facilities into the US to circumvent these levies. This will create numerous direct and indirect jobs in the US.

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