The summer is heating up, and so is the rhetoric and the reality of an escalating trade war between the U.S. and several other countries. We are indeed living in unprecedented times, when what may seem like positive quickly turns negative and unintended consequences are guiding the fortunes of a lot of companies.
A poster child of this effect was this week's earnings release and press conference from Whirlpool, the appliance company. In an earnings season that has been really strong, the company saw its stock drop 14 percent as it disclosed higher raw material costs — notably steel. Analysts downgraded the stock on concerns that it will not hit its revenue targets. The kicker here is that Whirlpool was happy earlier this year to tout the announcement of tariffs being imposed on foreign washing machines. But the flip side of the tariff equation is what is now hurting the company.
An interesting side note is that the company's CEO, Marc Bitzer, noted in the press conference that U.S. steel is 50 percent more expensive than the rest of the world — a level he called “unexplainable" — with the implication being that steel companies in the U.S. are raising their prices more than what can be justified by tariffs. In fact, we are starting to see a lot of business adjustments and disruptions as this unfolds.
That said, what is the effect of tariffs on markets as a whole? We were debating that on the foreign exchange desk this week. While there are a lot of indicators out there, equities are a great measure of market sentiment. If you take mid-April as the time when tariffs really started to become real to markets, the S&P 500 index is up nearly 5 percent, Mexico's equity market is up 2 percent, Canada's main index is up nearly 6 percent, and Europe is up just over 1 percent. The Shanghai Composite Index, however, dropped more than 14 percent from its recent high before coming back 6 percent in recent days as China has been aggressively easing monetary conditions.
Our View: On their face, equities are not sounding the alarm around trade wars in most countries except China. Of course, there is a huge caveat here, which is that all these markets have many factors affecting them. The U.S. is no doubt enjoying tailwinds from lower corporate taxes this year as well as an environment of deregulation. Canada's economy has been strong and it is enjoying higher oil prices that are supporting its energy exports.
That said, individual sectors and companies need more analysis. For that, we refer you to how City National Rochdale is approaching investment decisions in this environment. You can see that in Matthew Peron's latest Market Perspectives video. Be sure to sign up for their webinar, Trade Wars: What's Our Battle Plan, next Wednesday as well.
If we can help you with any Foreign Exchange needs, please email firstname.lastname@example.org or call (800) 447 4133.
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