Stock markets rise despite growing Syria tensions

Markets are still poised for the possibility of military conflict erupting in Syria between the US and her allies (Britain, France, Saudi Arabia and possibly Turkey) and Russia, with the backing of Iran and the Syrian regime. While NATO members are preparing a response to the alleged chemical weapons attacks in Ghouta, Trump’s Defense Secretary James Mattis warned any strike should be carefully planned to avoid a major conflict between the superpowers.

Even if a war is avoided, the events of the last 2 weeks (including US sanctions on Russian businesses and oligarchs) have severely damaged US/Russia relations. Reports say Russian lawmakers have drafted legislation which proposes to ban American imports including software and medicines, as well as stopping cooperation on atomic power and more.

The American sanctions put in place a week ago, caused the Russian RTS index to fall -11.4% on Monday, it’s biggest one-day decline since December 2014. The Russian Ruble also suffered a dramatic fall against both the Euro and Dollar as foreign investors pulled out of Ruble-denominated Russian government debt.

At the moment, peace reigns and stock markets are in positive territory. European indices are on track to make weekly gains despite geopolitical worries. The FTSEurofirst 300, which tracks the 300 largest companies ranked by market capitalisation in the FTSE Developed Europe Index, is up for the week despite geopolitical turbulence (see the chart below).

Keep in mind that in the long term, a US strike in Syria may not have too much of an impact on indices, and may only cause a short term bearish movement. It all depends on whether the situation deteriorates further. Right now NATO countries seem to be waiting on Trump’s administration to act, but what they will do is no clearer now than it was earlier in the week.

Eurofirst

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China vows to retaliate to U.S. tariffs on steel and aluminium as prospect of trade war looms

The Chinese government in Beijing has confirmed it will retaliate if the Trump administration goes ahead with a plan to place tariffs on steel and aluminum imports from China and other nations including Brazil.

In the latest progression in tensions between the 2 countries, Wang Hejun, a senior official at China’s Commerce Ministry said: “If the final decision from the U.S. hurts China’s interests, we will definitely take necessary measures to protect our rights.”

He was of course referring to proposals drawn up by U.S. Commerce Secretary Wilbur Ross, who last week recommended Trump should impose tariffs on foreign suppliers of metals due to ‘national security’ issues, as well as unfair trade practices including steel ‘dumping’. Dumping is the process of keeping steel prices artificially low, which has the effect of pricing other producers out of the market. Republicans in Washington argue that this practice negatively impacts the ability of U.S. steel companies to compete, thus hitting communities in America which have depended strongly on manufacturing jobs, and have been decimated by the closure of factories, particularly across the rustbelt.

Trump’s more protectionist rhetoric on trade and his skepticism of globalisation resonated strongly with voters in these communities in 2016, yet this is an age-old problem that was a hot topic even under Obama. Even notoriously anti-Trump news outlet CNN formerly sympathized with his perspective. In a report in 2016, CNN said that the American steel industry was “being hurt by an unprecedented surge in unfairly traded imports, with record amounts of foreign-produced steel flooding into the United States. Cheap, subsidized foreign imports are taking steel jobs away.”

Whether these tariffs are good for the American worker is yet to be seen, because this is only the second salvo to be fired in what could become a full blown trade war, but it’s fair to say the ramifications of this action from the Trump administration will be significant, given that China produces around half the world’s steel. Trump has until mid-April to decide on whether to go ahead with the proposals, which would mark the second major action on trade after he imposed tariffs on solar panels and washing machines from the Asian superpower in January.

The move won’t be a surprise given the rhetoric Trump used during the campaign and in his first year in office. He’s set his sights on renegotiating everything from how much NATO members spend on their military budgets to coming down hard on Canada’s lumber industry, whereby the Department of Commerce set total import tariffs at above 20 per cent for most Canadian softwood lumber producers last November.

China’s Ministry of Commerce soon went on the defensive, and said the conclusions from a US departmental national security review of the steel and aluminium industries were incorrect, because China has proven its products did not threaten U.S. national security. Wang Hejun said: “The spectrum of national security is very broad. Without a clear definition, it could easily be abused. If every country followed the U.S. on this, it would have serious ramifications on the international trade order.”

Fed sounds hawkish on interest rates / Trump tax reforms in focus

September 27th

Yesterday Federal Reserve head Janet Yellen reaffirmed the central bank’s commitment to keep pushing interest rates higher, saying that it should not be too gradual in its approach – words that will be seen as refreshingly hawkish to many investors. Confirmation of another rate hike in December has pushed bank stock prices higher this morning once again, even across Europe.

Today a major focus for investors will be what President Trump announces about tax reform in a speech later today in the US. A plan to simplify the American tax code and cut tax rates for individuals (especially those in the middle class) and companies, was a key message in Trump’s campaign. It is expected that the tax rate for corporations will be reduced by 15%, from 35% to 20%.

Though Trump has repeatedly stated that rates for businesses would be reduced to 15%, Republican Speaker of the House Paul Ryan (pictured shaking Trump’s hand) indicated in a New York Times interview recently that this may not be a realistic option. Still, any cuts they can get through would potentially be a great leap forward for the US economy and benefit investors simultaneously.

By reducing overall taxation, US companies may become more competitive financially. With lower rates across the board, many firms who were tempted to move abroad to save capital (cheaper labour costs, lower taxes) may choose to stay in the US too, creating more jobs instead of laying off their US-based workforce. A more favourable environment for businesses and individuals is likely to spur economic growth (which will boost stock markets too). The question now is whether the team behind tax reform can convince congress of the merits of the plan and get it passed.