US President Donald Trump last week toned down his rhetoric on multiple issues ahead of his 100th day in office this week, including Washington’s trade policies on China and threats to fire US Federal Reserve Chair Jerome Powell. Trump was also reportedly planning an exemption on levies for some auto parts to demonstrate his responsiveness to industry concerns. All of this suggests he wanted to project a more market-friendly image, as Wall Street investors braced for a sharp market downturn and US consumers’ long-term inflation expectations climbed to their highest level in decades.
The market cheered the development, with the Dow Jones Industrial Average last week posting a 2.48 percent rebound and the S&P 500 showing a 4.59 percent rise. However, the Dow Jones Industrial Average was still 10.89 percent off its record close on Dec. 4 last year, while the S&P 500 remained down 10.07 percent from its all-time high on Feb. 19. Meanwhile, the 10-year US Treasury bond yield last week closed at 4.267 percent, up 0.275 percentage points from this year’s closing low of 3.992 percent on April 4, while the US Dollar Index, a gauge of the greenback’s value against six major currencies, remained capped at 100 for two consecutive weeks.
Even as Trump appears to be moving away from his hardball tactics in global trade negotiations, investors remain unconvinced of his seemingly conciliatory gestures of late. Their worries about the president’s unpredictable trade approach and on-and-off tariff threats persist. After all, the perception in financial circles is that any tariff exemptions on certain auto part imports might end up being just temporary, as are those on smartphones, computers and some electronics the Trump administration announced on April 11. At the same time, the US’ baseline tariff of 10 percent on all other countries remains in place and Trump’s “reciprocal” tariffs on specific countries are still set to take effect in July after a 90-day pause.
Furthermore, investors have no assurances that Trump would stop his criticism of Powell and no longer threaten the Fed’s independence. Trump is unlikely to hide his frustration with the US central bank if the Federal Open Market Committee meeting on Wednesday next week resolves to keep interest rates unchanged again. He would then likely resume his criticism of Powell, even louder than before. Nor is there any guarantee that China would be drawn into trade talks with the US in the near term, unless certain conditions are met. Any sign that Trump might back down from his tough stance on Beijing would be political suicide.
Investors remain skeptical about Trump. Their heightened concerns about the president’s trade policies indicate the uncertainties over the world economy and the Fed’s monetary independence, which in turn suggests investors doubt that the US is a stable investment destination, which is compounded by their hesitation to hold US stocks, treasuries or dollars as valuable assets. Last week, a Reuters/Ipsos poll found that 59 percent of Americans think that Trump is costing their country its credibility on the global stage, with the his overall approval rating at 42 percent, the lowest since he returned to the White House in January.
After all, the Trump administration’s softer tone on China does not signal a quick deal between the world’s two largest economies. Risks surrounding US-China tensions are likely to persist for a while. In addition, Trump has shown no indication that he would deviate from his strategic objectives in his global trade policy, which includes containing China’s rise, reducing US trade deficits and bringing manufacturing jobs to the country. Investors are advised to continue buckling up for more financial turmoil before Trump achieves his goals.
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