Trump’s Greenland gambit reignites trade war fears
In classic Trumpian style, America’s 47th president upended global trade again over the weekend by threatening to impose fresh tariffs on eight European countries that oppose his project to acquire Greenland.
Highlights:
Trump threatens Europe with tariffs over Greenland.
Higher tariffs set to come into effect in February.
US data points to “low fire” labour market.
Euro Area PMIs set to confirm growth rebound.
UK economy bounces back in November.
Japan elections called for Feb. BoJ set to hold.
The UK, Germany, France, Netherlands, Sweden, Norway, Denmark and Finland will all face extra 10% import tax rates on 1st February should a deal on Greenland fail to be reached – tariffs that will increase to 25% should no agreement be struck by 1st June. Where we go from here is unclear. As we know, Trump has a track record of using these tariff threats as a negotiating tactic and a blunt instrument to get his way on the global stage. Yet, Denmark clearly has no interest in selling, nor do the country’s European peers appear to have the appetite to bow to Trump’s demands.
This time, the initial market reaction in the currency market has been contained, and we are not yet seeing signs that the “sell America” trade is back in full swing. We are not jumping to conclusions. We’ve been here many times before of course and, for the most part, Trump’s big, bombastic tariff threats have not come to pass or, at the very least, have been unwound soon after the fact. While we expect history to repeat itself, the unpredictability of the Trump administration means that nothing can be taken for granted.
The economic calendar this week features UK labour data on Tuesday and inflation data on Wednesday, followed by worldwide PMIs of business activity. There will be few monetary policy announcements of note. Markets will remain focused on headlines about the latest flare up of the trade war across the Atlantic, specifically on the European reaction. We will be specially attuned to any signs that the Sell America trade from last April is back on.
USD
The US dollar is proving resilience to concerns over institutional degradation in the US, and the news on Trump’s criminal investigation of Chair Powell has had limited impact on the greenback so far, probably as markets don’t really expect the case to progress much further. Firm macroeconomic data and strong equity performance have so far kept the dollar high. Last week’s initial jobless claims figure remained consistent with a low layoff economy, despite the recent drop in job creation, and the Fed will likely be comfortable sitting on its hands for a little while yet.
The PCE inflation report for December stands out this week. However, renewed uncertainty over trade policy will probably be a critical factor in the near term. Markets have not yet reacted to this new bout of policy volatility by selling the dollar as they did back in April, but that could turn on a dime should Trump continue to bully his way to a deal on Greenland.
EUR
We are now seeing fairly clear evidence that Germany’s mammoth fiscal stimulus package is having the desired impact on economic activity in the Euro Area. Eurozone industrial production surprised to the upside and rose healthily in November. Accordingly, we would not be surprised to see a positive surprise when the January’s PMIs of business activity are released on Friday, even though the consensus expectations are already quite rosy.
The euro should react positively to any such surprise in this week’s data, although we note that geopolitical worries regarding Greenland and fresh US tariffs will probably be a much stronger factor than macroeconomic data for now. The big fear here is that the latest round of US protectionism could jeopardise the US-EU trade deal and trigger an all-out trade war between America and Europe that would create nothing but havoc and harm global growth. The saying goes that Trump always chickens out and while we suspect that he probably will again, expect heightened market jitters until he does.
GBP
We finally received some upbeat news on the state of the UK economy last week in the form of meaningful upside surprises in the latest monthly GDP and industrial production figures. The UK economy held up surprisingly well in November, despite the acute uncertainty surrounding the Autumn Budget. We are not getting too carried away, however: the monthly GDP data tends to be highly volatile, while the mild contraction in activity in October suggests that the economy likely grew by only 0.1-0.2% in Q4, which is consistent with effective stagnation. Yet, swap markets have continued to dial back bets in favour of further BoE rate cuts (the next 25bp cut is now not fully priced in until June).
This week’s UK labour data takes on added importance to confirm the sharp slowdown in job creation seen over the last few months. Aside from the official unemployment rate, we will be paying particular attention to the December change in payrolled employees. An expected bounce back in UK inflation the following day should validate the MPC’s cautious approach to further monetary easing and, if confirmed, could provide some upside for sterling.