US-EU Tariffs
The European Union (EU) seems to be getting concerned about trade. An internal memo is suggesting that the global rules-based international trade system may be breaking down. So far of course the rules-based system may be breaking down with regards to trade with the United States. For the most part, trade with most of the rest of the world is carrying on largely as normal.
Separately, President Donald Trump on Friday said in a tweet:
“Based on the Tariffs and Trade Barriers long placed on the U.S. and it great companies and workers by the European Union, if these Tariffs and Barriers are not soon broken down and removed, we will be placing a 20% Tariff on all of their cars coming into the U.S. Build them here!”
EU Commission Vice President Jyrki Katainen told French newspaper Le Monde “If they decide to raise their import tariffs, we’ll have no choice, again, but to react.”
An escalation of trade tensions is clearly a key risk, and while direct effects from tariffs are likely to be modest, indirect effects via declines in business confidence could pose a greater risk.
China
The People’s Bank of China (PBOC) said on Sunday it would cut the amount of cash that some banks must hold as reserves by 50 basis points (bps), releasing $108 billion in liquidity, to accelerate the pace of debt-for-equity swaps and spur lending to smaller firms.
The latest targeted cut in some banks’ reserve requirement ratios (RRRs) - currently 16 percent for large banks and 14 percent for smaller banks - will take effect on July 5, which is just a day before the United States and China are expected to begin collecting increased tariffs on respective lists of goods.
The cut is not a huge surprise having been flagged in reports last week. The cut reflects the clear desire of the Chinese authorities to provide stimulus to the economy as trade comes under threat.
Yes, the PBoC switches further towards a more accommodative monetary policy which should result in a further softening of the Chinese currency, the yuan (CNY).
Turkey Elections
On Sunday, in Turkey we had presidential and parliamentary elections. Current President Erdogan and his party block AKP/MHP (Justice and Development Party & Nationalist Movement Party) have won both elections.
With more than 99 percent of ballots counted, Erdogan had 53 percent of the presidential vote to 31 percent for his closest challenger, Muharrem Ince of the secular Republican People’s Party or CHP.
It’s certainly not an overstatement saying that the results mark the last step towards Turkey’s transformation into a one-man regime.
The financial markets will now want to see what policies Mr. Erdogan will put in place to bring Turkish growth rate back to a sustainable level and to restore sufficient confidence to be able to encourage capital inflows.
President Erdogan’s previously stated economic point of views have rather challenged economic convention.
As Erdogan’s win removed some political uncertainty, the Turkish lira (TRY) strengthened 3 percent on the news, but that won’t probably last for long. Turkish lira’s volatility remains the highest among emerging economies’ currencies.
In clear terms all this means that long-term investors could do well still staying away from the Turkish currency and markets, at least for the moment. I personally I still expect a weaker lira in the second half of the year.
Geopolitically speaking, it might be helpful keeping in mind that President Erdogan has increasingly sided with Russia in the Syrian civil war, the “fulcrum” of a great-power contest for Middle East influence. Erdogan has also talked about joining the Eurasian bloc headed by China and Russia and has forged alliances with the Muslim Brotherhood and some Gulf Arab states.
Mexico Elections
Besides that, over in Mexico we’ll general elections next Sunday, July 1. The polls seem to confirm that the leftist candidate Andres Manuel Lopez Obrador has consolidated his lead over his rivals.
Lopez Obrador has made it clear during his election campaign that he would prefer rather no NAFTA than a bad deal. He is not really looking for a bilateral agreement with the U.S. or Canada, but it’s the trilateral agreement that he wants.
Investors could do well keeping in mind that Lopez Obrador won’t take office until December 1. It will be ex-President Enrique Pena Nieto’s administration that will continue the NAFTA talks till then.
Dramatic changes in the Mexican peso (MXN) are not in the cards.
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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