World markets can absorb some trade turbulence as Trump digs in

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LONDON/GENEVA: Booming global trade and economic growth have cushioned world markets against the political turbulence of Donald Trump’s first year in the White House, but that resilience will be tested if the US president wants protectionism to define 2018.

With stocks on one of their longest bull runs in history, they are particularly vulnerable to upsets, although the global economy’s strength means they could probably absorb greater trade conflict – provided governments keep it all within limits.

Emboldened after finally pushing his signature tax cut reforms through Congress, Trump seems likely to train his sights on trade — another pillar of his election pledge to “Make America Great Again” — by fixing its deficit and punishing countries deemed to be profiting at US expense.

His administration is beating the trade drum ever louder.

This month, it has announced steep US tariffs on imported washing machines and solar cells, Commerce Secretary Wilbur Ross has warned China over intellectual property practices and Treasury Secretary Steve Mnuchin has endorsed a weaker dollar to help American exports.

Discussing trade wars at the World Economic Forum in Davos, Ross said: “US troops are now coming to the ramparts.”

That warning provoked only a short-lived wobble in world stocks, with investors reluctant to bail out of a market still clocking record highs at an accelerating pace even after adding $9 trillion in value last year.

Much of that bullishness is down to a sustained rebound in trade in recent years, with volumes growing at a faster pace than world gross domestic product.

Despite Trump’s protectionist rhetoric of the past year and actions such as pulling the United States out of the TPP trade pact for Pacific Rim countries, indicators show no let-up.

Global trade is expanding at annualized rates of more than 4 percent, the strongest performance since 2011, according to the Netherlands Bureau of Economic Policy Analysis. Freight volumes are surging at the fastest pace this decade.

Merchandise trade is likely to have expanded 3.6 percent in 2017 in volume terms, rebounding from the post-crisis low of 1.3 percent growth in 2016, the World Trade Organization reckons. Overall, the IMF forecasts global GDP will expand 3.9 percent this year.

But investors fear a shift from rhetoric to action may still hurt markets even if the robust growth acts as a shock absorber.

“Protectionism means lower growth and higher inflation. That’s the worst possible combination you can have when markets are at record highs,” said Luca Paolini, chief strategist at Pictet Asset Management.

However, the world economy’s strength and double-digit company earnings allow markets to “absorb a lot”, Paolini said.

He cited short-lived reactions to Britain’s impending exit from the European Union, political upsets elsewhere on the continent such as Catalonia’s failed referendum on independence from Spain and North Korea’s nuclear weapons program as examples of how much flak the market was able to take.

 

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