Tariff war: what to expect between now and the end of the summer

5 July 2018

Mario Draghi has managed to turn the bad news that quantitative easing would end into the good news that European interest rates will remain low for at least another year.

In so doing, he has, on one hand, sent a positive message putting an end to the speculation that was rising on the BTP/Bund spread, while on the other, he has let the air out of the rally in bank stocks, redirecting interest towards utilities.

These are the two main consequences of flat interest rates and quantitative easing on the Italian market. But the factor that most affected equity markets, including Italy’s, is due to what can now be called a tariff war.
Threats of tariffs always bring uncertainty, and financial markets do not like uncertainty. The clearest sign of this can be seen in certain sectors, such as industrial goods most closely tied to exports, with fewer repercussions on luxury goods, demand for which is less affected by prices. While trade tariffs provide a blow to the industrial sector, purely domestic businesses remain less exposed.

What can we expect between now and the end of the summer? Volatility will certainly remain high, with continuous ups and downs on financial markets until fears of rising tariffs die down. These fluctuations in stock market indexes will even be evident within the individual sectors, with opposing trends in some cases, even in the short-term, and investments moving from one sector to another, from cyclicals to non-cyclicals and vice versa depending on market situations. All this confusion on modern markets is exacerbated by the abuse of algorithms and trading programs…

It’s too early yet for long-term forecasts; for Italy, it would be wise to wait until the next big event, when the government presents the Finance Act in early October and, for macroeconomic predictions, the US mid-term elections in November. Until then, Trump will probably keep looking for consensus at home. His policies are not meant to slow the economic cycle, although it is clear that he’s more concerned with the US market than the global economy.

By Massimo Trabattoni, Head of Italian Equities at Kairos, for the “Italian Times” column of AdvisorPrivate.