Market Overview

Trade Wars: Only A Stock Market Crash Can Stop Trump, 3 Reasons

  • Trump continues pursuing a tough stance on trade on three fronts.
  • Concerns about trade dominate the headlines, but the impact is not decisive
  • An end to the "buy the dip" mentality can change the President's mind.

There is no letting down in US President Donald Trump's trade wars, on three fronts. In North America, the row Trump had with Canada's Prime Minister Justin Trudeau joined stalled NAFTA talks. The European Union is about to impose retaliatory tariffs against the US, and it will not be surprising to see a US counter-retaliation. 

And with China, the world's second-largest economy after the American one, the dispute is getting worse. After slapping China with tariffs worth $50 billion and the angry response, the Administration is now considering adding a 10 percent tariff on no less than $200 billion worth of goods

There are growing reports about the damage already done, with the most recent warning coming from Daimler, which directly linked trade to a lower profit margin. Canada is probably suffering more than any other country.

Nevertheless, stock markets are mostly calm. With every new development, equities lose some ground but recover within a few hours. The markets have a short memory for the latest worrying deterioration on the trade front but have a long memory for the "buy the dip" mentality

Yet while the pain in stock markets is temporary, the shock to the global economy is real. At some point, investors are going to realize what is going on and begin selling off.

And that may change Trump's mind. Here is why:

1) Donald ♥ Dow

The US President boasted over and over again about record highs in stocks, especially the Dow Jones Industrial Average. He stopped tweeting obsessively about stocks after they fell in February, but that does not mean he does not care. 

Once his name is attached to new lows and not new highs, he may rethink some of the moves.

2) The President can climb down under pressure

Trump has an image of being tough and doubling down on his outrageous claims when he is criticized. However, he is not immune, especially when it comes to pressure from companies. His decision to stop the separation of children and babies from their parents at the US border came after an immense public outcry. It is important to note that part of the protest came from three airlines that announced they would not participate in flying the separate children.

This pressure, not from Democrats or the media, contributed to the climb down. 

3) Investors are more critical than farmers to Republicans

This is the sad truth. US farmers, many of whom voted for Trump, already suffer the higher metal prices that are a result of the tariffs. However, they are a small and not that influential group. However, a fall in stocks hurt almost all Americans via their 401(k) programs and many households that invest in stocks. Moreover, investors really liked Trump up to now. They loved the deregulation, they adored the tax cuts which benefited them, and they were ready to forgive him for basically everything else.

But if they feel the pain in the pockets, they do not only have the President's ears but also Republicans' ones. The mid-term elections are not that far away, and donor money is needed to hold onto the House. A proposal to take away Trump's powers to impose tariffs is already on the table. To avoid such humiliation, he will need to tame down his instincts and change tack. 

The sooner stocks crash, the better for the global economy.

Posted-In: FXStreetNews Forex Markets


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