One week / one topic: Trading places

What happened?

President Trump announced plans to impose a 25% tariff on all steel and aluminum imports into the US, affecting major suppliers like Mexico and Canada, as part of his broader trade policies.

Tariff Man has come out swinging, and this set of sanctions is likely going to impact various industries, including aerospace, auto manufacturing, and energy, potentially leading to higher consumer prices and reduced trade flows.

Canada – not exactly what you’d immediately identify as an adversary to the US – stands to be the most affected due to its significant role as the largest steel supplier to the US and its dominance in the aluminum market, providing 58% of US aluminum imports.

While aluminum exports to the US account for only ~ 0.5% of Canada’s GDP, this is just an(other) example of where we are today in terms of trade and – more generally – international relations.

The Canadian dollar had already been weakening meaningfully even before the election in line with Trump’s rising odds, and now sits not far from 10-year lows. Markets seem to imply that there is more to come?

While these more recent developments ultimately only represent a small part of the picture, the rules of the game have changed and players need to deal with it. (Japan PM Ishiba on meeting with Trump: “I do think we have chemistry”)

What does this new world order portend then across markets?

Our observations

• Fundamentals: There are deep structural reasons why the US has had such a large and growing trade deficit for a long time. Policy can sway behavior in the short term, but what’s next?

• Price action: Equities actually staged a small rally on Monday morning, with bond yields largely unchanged. Perhaps this is a sign of relief as things could have been worse, or maybe markets had already priced this in?

• Investor beliefs: Almost all the ‘Trump trades’ have actually backfired this year, adding to investor confusion but unlikely to meaningfully deter Americans from keeping to plow money into Equities…

So what?

While the focus remains on the latest White House announcements, we keep looking for opportunities to generate returns in areas that investors are not paying (enough?) attention to.

After buying shares in Europe- and UK-listed global, quality companies in early December – visibly outperforming the S&P 500 so far – we have also been adding to our EM bond positions and trimming Credit at the same time.

Mood music: Depeche Mode - Enjoy the Silence