Last year, there was consensus among the financial community that Donald Trump was good for the market. This, coupled with strong earnings from companies made the global stocks markets to realize double digit gains and volatility to remain at a multi-year low.
In the beginning of the year, while investors were optimistic about Trump’s deregulatory and tax reform process, they were worried about his campaign rhetoric about trade. As the year progressed and as he started tweeting about the stocks market, investors felt comfortable. They imagined that he would not self-destruct by engaging in a trade war.
Last week, all this changed when Trump told the media that he would introduce tariffs on steel and aluminum. In his statement, he said that he would introduce 25% tariffs on steel and 10% on aluminum. The new tariffs, which are aimed at China, will affect all countries, including the allies like the European Union, Japan, and South Korea.
On Friday, the countries responded angrily to Trump’s rhetoric. The European Union promised to retaliate by targeting specific companies, especially those from Republican led states like Wisconsin and Kentucky. By doing this, they intend to put maximum pressure on Trump.
On Saturday, through a tweet, Trump promised to respond also. He said that he would target EU’s auto industry by imposing more tariffs. Bu doing this, Trump would introduce a likely 10% tax on all EU-made cars like Mercedes and Porsche.
Other countries like Canada, Japan, Mexico, and South Korea will also respond, bringing the top developed countries to a trade war, which no one will win. In fact, the likely winner in all this will be China and the biggest loser will be consumers and the general public which will shoulder the increase in production costs.
Another major news over the weekend was from Germany. The Social Democratic Party held a poll where they decided to form a coalition with Angela Merkel. This will be Merkel’s fourth term as chancellor and ended a prolonged period of uncertainty in Germany. 66% of all those who voted supported the coalition. By this vote, Merkel will form a new government by March 14.
On Sunday, Italians went to a highly contested election whose results will be highly consequential. As of this writing, the official results were not in but, the results show a surge in populism in the country. The current projections are that the populist party, Five Star Movement will get 32% of the vote while the center right party championed by former prime minister Sylivio Berlusconi will get 36% leading to a hung parliament. Ultimately, the country will have to wait longer before a new government is formed.
In South Africa, tensions rose as the country’s parliament voted on a bill to cease land from white farmers. The vote was supported by the ruling ANC and the opposition party, Economic Freedom Fighters. This will be the first major test for the new president, Cyril Ramaphosa. A similar move was done by Zimbabwe, a once successful country in Africa under Mugabe. Years later, the country’s economy fell. The increased tensions could derail the strength of South African Rand which was starting to gain after the exit of Zuma.