Trade War from the Trenches: the dogs bark but the caravan moves on (for now)

  • More and more warnings about trade abound, but markets take things with a stride.
  • Powell said that the Fed continues raising rates for now. "For now" may apply to market calm.
  • Our third tranche of Trade War from the Trenches discusses the calm that may precede a storm.

No news is good news. The old saying is relevant to markets when talking about trade. The previous week saw the US announcement about new tariffs on China, on a whopping $200 billion worth of goods. The implementation is due at the end of the summer which is the eternity for financial markets. The news stole the show from trade tensions between the EU and the US around the NATO Summit. Negotiations between the European Union and the US will commence next week.

The only news that came out on trade does not involve the US, making it a positive piece. The EU and Japan signed a free trade agreement. The deal now awaits a ratification process which may last years. The accord does not have any immediate, practical outcomes. Nevertheless, the political message from both allies of the US is clear: they will continue pursuing lower tariffs and free trade.

Despite the lack of any significant developments, many prominent influencers have voiced their opinions. 

Fed Chair Jerome Powell was upbeat about the accelerating economy, the robust job market that draws previously discouraged people, and the gradual rise in inflation. He tried not to touch the politically explosive topic of trade, but he gave in his views. Answering questions, Powell said that lower tariffs are better than higher ones. He also gently mentioned that uncertainty is postponing business decisions.

The International Monetary Fund (IMF)  released a report saying that Trump's trade wars could cost the global economy some $430 billion and that the US could find itself as the "focus of global retaliation." They also said that the expansion is becoming less even, and risks to the outlook are mounting.

European Union President Donald Tusk issued a stark warning saying that trade wars can lead to “hot conflicts." He also called the other Donald, US President Donald Trump, to reform the world order rather than bring it down. 

Citi, a prominent bank, calls Trump's trade policies "brutal" and "neo-mercantilist." They also said that the unilateral action had punctured the good faith built up over the years. Their silver lining is that Trump will change tack after the mid-term elections in November. 

The list, only from the last few days, goes on and on. It includes the World Bank, former Treasury Secretaries Paulson, and Geithner, Blackrock's Larry Fink, and you name it. 

Yet markets are calm

The dogs bark and the caravan moves on.

Stock markets dip on each significant piece of worrying news and the "buy the dip" mentality returns quite quickly. Minor news and warnings about trade have a diminishing impact. What cannot fall on bad news, is bound to rise.

Apart from Chinese equity markets, global stocks are looking good. The current situation is still OK. But the storm is undoubtedly brewing. Timing is everything in markets and a crash may be imminent or may wait forever. As John Maynard Keynes said:

The market can remain irrational longer than you can remain solvent

We have seen one significant change in behavior: the US Dollar has become the ultimate safe-haven, dethroning the yen

When market behavior and correlations change, is it a sign of a more significant move to come?

With the damage already done by some tariffs and the postponement of investment decisions, something will have to happen: either Trump backs down, or markets fall. And with so many warnings from top economists and institutions, it is hard to see markets shrugging it off for a long time.

In economics, prophecies can sometimes fulfill themselves. Buyers still have the upper hand, but they may lose trust. When they pull the rug, it could get ugly. 

More: Trade wars: Only a stock market crash can stop Trump, 3 reasons

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.

Analysis feed

Latest Forex Analysis

Editors’ Picks

EUR/USD holds onto gains around 1.1150 amid Brexit, trade headlines

EUR/USD is trading around 1.1150, holding onto gains. The common currency was swept higher with Brexit optimism and after China said concrete progress with the US. The USD remains on the back foot.


GBP/USD tops 1.30 amid upbeat Brexit developments

GBP/USD has topped 1.30, a fresh five-month high, as parliament is set to debate the detailed Brexit bill, with the EU ready to grant an extension. The DUP is set to reject a customs union amendment.


USD/JPY ticks higher, up little around mid-108.00s

The USD/JPY pair edged higher on the first day of a new trading week and is currently placed at session tops, just above mid-108.00s.


Top 3 price prediction BTC, ETH, XRP: Building on future profits

The trading week is kicking off with a continuation of the last week's scenario. The consolidation process continues and deepens, especially in the relationship between Ethereum and Bitcoin.

Read more

Gold: Sidelined near $1,490 after PBOC's rate decision

Gold's struggle for clear directional bias continues after the People's Bank of China's (PBOC) interest rate decision. The yellow metal has been restricted largely to a narrow range of $1,500 to $1,480 since last Monday.

Gold News

Forex Majors