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Investors are bracing for collateral damage from spreading protectionism as the fallout potentialy could be massive. Markets are overreacting to President Donald Trump’s threats of a trade war. Trump is using the issue for political gain, rather than actual trade repositioning. This will give him a nice bullet point for stump speeches in the 2020 campaign, but he gains little from sparking a full-blown trade conflict. Besides, the World Trade Organization is still in action. The EU is part of a small group that was granted an exemption from Trumps from protect 25% steel and 10% aluminium tariffs, however until May 1st.
Currencies with significant export exposure to the USA such as MXN have declined, while those with solid domestic demand and lower reliance on exports such as INR remain solid. Even the generally beta-sensitive ZAR has improved (marginally helped by gold trade).
We see this as an opportunity to reload in emerging markets: ZAR, INR, PLN and MXN all look interesting.
Markets are on a knife-edge, fearing a trade war. China is unlikely to sit idly in response to Trump’s bluster. Asia markets were lower across the board while safe haven CHF and JPY were the only real gainers in forex. Trade protectionism is the primary focus in EM currencies and with a real risk China responding to the US administration’s policy strategy in relation to Section 301.
According in sources China's commerce ministry is consideirng two steps of retaliatory action:
15% tariff on select goods worth almost $1bn - including fresh fruit, nuts and wine
25% tariff on select goods worth nearly $2bn - including pork and aluminium scrap
China is also targeting imports that directly effect states that form Trumps political base.