Another BRICS in the trade war wall

EM FX in focus

As the new trading week dawns, all eyes are fixed on the dollar, particularly its traction against the currencies of emerging markets. President-elect Donald Trump's latest confrontational stance toward the BRICS nations—Brazil, Russia, India, China, and South Africa- sparked this intensified focus.

In a fiery tweet over the weekend, Trump issued an ultimatum to the BRICS: either steer clear of launching a new currency or endorsing an alternative to the U.S. dollar or brace for a sweeping 100% tariff imposition. His directive adds a fresh layer of complexity to global economic relations and could signal seismic shifts in international trade dynamics.

Trump's aggressive policy doesn't stop there. Just last week, he roiled global currency markets by suggesting substantial tariffs on China, Mexico, and Canada—nations that account for significant portions of the U.S. trade deficit. This move is seen as part of a broader strategy to assert American economic dominance and recalibrate trade balances in favour of the U.S.

President Trump hasn't yet focused his tariff threats on Europe, but with the continent's significant trade surplus with the U.S., it seems almost sure that he will. In a strategic response, ECB President Christine Lagarde advocated for a diplomatic approach instead of retaliation. She suggested Europe should increase its imports from the U.S. to sidestep a potential trade war that would benefit no one and could choke global economic growth. With a critical tone, she asked, "How do you make America great again if global demand is plummeting?" This underscores the inherent contradiction in Trump's aggressive trade policies that risk undermining global economic stability.

Frankly, any country with a trade surplus should be on edge; they're likely to come under the intense scrutiny of U.S. tariffs. This includes not just the usual suspects like China, Vietnam, Japan, and Taiwan but any friend or foe, including countries within the EU.

No one relishes the idea of a trade war, particularly for those nations already deep in trade disputes with China. Germany, for instance, is grappling with its economic stagnation and unwanted tariffs on China, not to mention a government collapse in November. France is also navigating a budget crisis that could topple its government. It’s an inopportune time, to say the least. Most of Europe could align with President Lagarde's strategy to ramp up U.S. imports, a practical move to sidestep a full-blown trade war that benefits no one and threatens to stifle global economic growth.

There's already buzz about Europe increasing its LNG imports. Additionally, President Macron has eased up on his stringent 'buy-EU' stance, which previously barred non-EU companies, including those from the U.S., from participating in a program to bolster Europe's defence industry. This shift could significantly impact NATO dynamics, reflecting a more inclusive approach to international defence collaboration.

Markets

As market participants gear up for Monday's session, the unfolding scenario presents potential volatility and a critical juncture for the dollar's role in global finance, underscoring the far-reaching implications of Trump's economic “ American First” nationalism on world markets.

Last week's trading scene, which seemed poised for a typical, tranquil Thanksgiving lull, unexpectedly transformed into a bustling financial spectacle. The bond market ignited the action with its most vigorous rally since the nervous days of early August. The 10-year Treasury yield took a dramatic dive, dropping 24 basis points to a serene 4.178%—its lowest since the previous month. This substantial decline electrified both the bond and equity markets, lighting up trading boards with a festive flair reminiscent of holiday celebrations.

The sharp decrease in yields can be largely attributed to Scott Bessent assuming the role at the helm of the U.S. Treasury Department. His arrival has been met with widespread approval, as seasoned market veterans commend his stable and experienced guidance, which promises calmer waters ahead. Additionally, easing Middle East tensions has played a crucial role in tempering inflation expectations and contributing to lower yields, with oil prices reaching a new low. This reduction in geopolitical risk owes much to the skilled diplomacy of the Biden administration, with an unexpected yet noteworthy contribution from Donald Trump, adding a layer of complexity and intrigue to the international arena.

This scenario perfectly aligns with the timeless wisdom found in the old trader's playbook: lower bond yields are generally bullish for stocks.

Although the market initially reacted cautiously to Trump's tariff threats—pondering the economic fallout—it soon became clear that these were not harbingers of a full-blown trade war but tactical maneuvers to negotiate better border concessions with neighbouring countries. As the week unfolded, what first appeared as a potential trigger for market instability instead underscored a strategic approach to trade that could reshape future economic interactions.

In a similar but infinitely more significant context, the BRICS tariff targeting, including both China and Russia, emerges as a monumental bargaining chip for Trump as he seeks to broker peace in Eastern Europe and better recalibrate trade flows with China. This strategic move amplifies the stakes, positioning the tariffs as economic tools and pivotal elements in global diplomacy.

China data

Encouraging signs are emerging from China, suggesting that Beijing's myriad of stimulus and support measures implemented in recent months might be starting to take effect. Over the weekend, a private survey revealed that new home prices in China increased at a year-on-year rate of 2.40% in November, up from 2.08% in October. Additionally, official purchasing managers index data released on Saturday indicated that China's factory activity expanded modestly for a second consecutive month in November, marking its fastest pace in seven months.

As Trump escalates his trade threats ahead of his inauguration next month, there's cautious optimism about whether there might be light at the end of the tunnel for China's domestic economy or whether that light is the US tariffs freight train barreling down the tracks.

Oil markets

WTI is trading higher in subdued markets, buoyed by the latest robust economic data from China over the weekend, and all eyes are now on OPEC's meeting this Thursday. Traders are braced for OPEC to extend its current production cuts, a decision that could keep a short-term floor under prices. Should OPEC decide to ramp up supply, however, we could see prices drop sharply. Meanwhile, Trump's recent tariff threats against BRICS nations have left emerging market currencies vulnerable, impacting countries that are key drivers of new incremental oil demand, and the strong dollar across EM could keep rallies tame.

With market volatility currently low, many oil traders are diversifying their focus toward other energy markets, keeping the trading landscape in a state of cautious anticipation until the next major market-moving event unfolds.