How can the US Government calm markets’ fears of a trade war?


The following guest post is courtesy of Amram Margalit, content manager at Leverate.

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Following an unprecedented climb from levels below 7,000 in 2009, the Dow Jones Industrial average recently attained the dizzying height in excess of 26,000 some nine years later. However, since the beginning of 2018, the market has been stuck in a volatile range, with prices rising and falling wildly on statements emanating from Trump Administration officials. In fact, the President himself is not averse to making “from the hip” comments that have often sent the markets reeling. Recently, after stating that the US would be prepared to issue 50 billion USD worth of trade tariffs on Chinese goods, the Chinese responded in kind, with a threat to raise tariffs on US goods arriving in China. President Trump, not to be outdone, played a trump hand and told the media that if China carried out that threat, then he would be forced to apply a further 100 billion USD tariff on Chinese goods. Such comments don’t just come in the heat of the moment—they’re carefully crafted in advance, but that didn’t prevent them from spooking the market, which has dropped over 2,000 points since the beginning of the year.

This precarious market situation was further exacerbated by the recent departure of former White House Economic Advisor, Gary Cohn, and former Secretary of State, Rex Tillerson, both viewed widely as internationalists, as far as trade is concerned. Cohn’s replacement, Larry Kudlow, seems to be less placatory in terms of relationships with foreign trading partners.

However, Kudlow, and his colleague, Fed Chairman Jerome Powell, are quite aware that a trade war would likely harm economic growth, as the US will be forced to find other market locations in which to sell, and even manufacture American products. In addition, foreign goods, being hit by import tariffs, will become more expensive for US consumers, who will still want to buy those foreign-made products. Even with tariffs, they will still probably be cheaper than locally-made US merchandise.

However, all is not gloom and doom. There are measures that the Fed and the White House can take to support the financial markets. These steps largely involve the manipulation of interest rates. Should the US stock market take a serious tumble below the recent lows of 23,500, then the Administration could respond by reducing interest rates. Of course, with rates still being at close to historical lows, this does not provide much room for maneuver. Should a full-blown trade war become reality, inflation is certain to climb, and that is not the time at which any responsible government would choose to cut rates. In fact, the opposite move of hiking rates would be recommended. This basically puts the Trump Administration caught between a rock and a hard place.

Towards the end of January 2018, the Dow paused for breath after its relentless, almost 10-year climb. Since then, from a technical perspective, recent market action has formed a descending triangle pattern. This involves steadily lower peaks with a flattened support at the 23,500. A significant fall below that low would be a very negative sign for the Dow.

President Trump clearly wants to carry out his election promises to stand up to the damage that cheap imports from the Orient are having on US jobs and the US economy. However, to do so could set the economy, and the stock market into a tailspin. Clearly, this is a time to tread carefully and less of an ideal moment to beat the trade war drums.

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How can the US Government calm markets' fears of a trade war?

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