The impact of US foreign policy on markets
Trade restrictions and tariffs are the main response of the Trump administration to foreign disagreements, but there are some positives too.
Donald Trump moves markets. He watches them regularly and tries to influence them by what he says and what he does. He sees a rising US share market as proof that he is making America great again. This week he has claimed credit for the peace agreement in North Syria between Turkey, Russia and the Syrian government. He asks: “How many Americans must die in the Middle East in the midst of these ancient sectarian and tribal conflicts?”
He answers his own rhetorical question by congratulating himself on not fighting a new war in Syria. He has removed the sanctions he imposed temporarily on Turkey when they invaded the Kurdish areas of Syria adjacent to the border. This reminds us that he sees economic sanctions and tariffs as preferable weapons to unleashing the formidable US military arsenal. He is trying to use commercial weapons against Iran to bring that country to better conduct as he sees it throughout the Middle East, and has shown reluctance to be drawn into a hot war there. Even when he claimed Iranian involvement in the missile and drone attacks on Saudi oil installations recently, he did not send in the bombers.
Positive for investors
The investment significance of this is positive. It means the risk of a major war or disruption in the Middle East is much reduced. Mr Trump’s critics claim it allows Russia too much sway and will result in a worse outcome in the local and regional civil and religious wars than if he followed a more active military strategy. They fear the forces they do not like in the Middle East will so strengthen their position there will, in the end, need to be a bigger confrontation involving the USA. Mr Trump does take sides in some of the conflicts, but is happy for his allies and proxies in the Middle East to do any fighting they think they need to do. He allies with both Israel and Saudi Arabia in the traditional US way, but sounds most convincing when he says his big aim is simply to keep out of the wars. He recently sacked his National Security Adviser for being too keen on wars. He does not express strong views on how the Middle East should be reconfigured or how individual Middle Eastern governments should behave.
Part of the reason for this big change of attitude is the Trump success in making the US self-sufficient in oil and gas output. The big increases achieved through his dash for shale means the US is not dependent on Middle East imports. He does, however, wish to avoid a damaging surge in the oil price. His response to the attack on Saudi oil installations which threatened to raise oil prices by creating temporary shortages was to authorise release of substantial US stockpiles if needed to keep the price down and to urge Saudi to do the same from its stockpiles. Nothing must be allowed to stand in the way of more growth and more jobs at home.
Trade remains a problem
The negative for investors from Trump foreign policy is the way he concentrates on trade restrictions and tariffs as his response of first and often last resort. The negative news on international trade is dominated by his choice to have a trade war with China. He has also imposed tariffs on the EU products following the Airbus enquiry at the WTO, and is looking at the whole question of asymmetric car tariffs between the US and the EU. Meanwhile, other trade wars include Japan against South Korea, India against Pakistan around Kashmir and the US against Iran. This has cut growth in world trade and has adversely hit confidence particularly by those who make decisions about industrial investment. So far, the impact is to reduce world growth modestly – but not to stall it.
We watch the Middle East and the China trade war as either could move markets substantially if there was a sudden worsening or a breakthrough in either. It looks as if we are in for the long haul in the US/China trade disputes, with a possible partial settlement of a few issues. The wider struggle between two superpowers will remain. It looks as if a major international conflict in the Middle East has been taken out of the script, but there are doubtless terrorist groups and rogue states who would like to put more violence on the agenda again.
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John Redwood is Chief Global Strategist at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.