Markets are feeling a corrective shock to a complacent idea that all the bluster emanating from the White House have been transactional feints. Yesterday’s reduction in tolerance on allowing negotiations appears to have been triggered by the current administration’s border analysis showing little change in the illegal flows of fentanyl entering the United States. Reaffirming 25% tariffs were to go ahead on Canada and Mexico next week and an extra 10% to also be placed on China, a shudder has been felt through all markets which at present are also particularly sensitive to end of month flows.

The intricacies of all the markets are boundless but in a general sweep of the main movers, investment flight is easily spotted. In currencies the Canadia Dollar and Mexican Peso obviously slump, but because the Yuan is interfered with by the PBoC, the Chinese currency is probably better reflected in China trade associative Australian and New Zealand Dollars, which also dive against a US Dollar pairing. With utterances again regarding Europe and a 25% tariff, the Euro also takes a tumble, exacerbated by an ECB rate decision next week where a cut is almost guaranteed. Therefore, the timing and pressure on Europe is immaculate and so it is with China. Next week also sees the annual parliamentary meeting where monetary policy is normally signalled, and Beijing has little time to react to the extra tariffs. These are not just shooting from the hip timings and policies (something we speculate on below).

The Yen, often an alternative flight instrument takes a run with the US Dollar and by doing so crushes the Nikkei 225 which had been bolted to a global fall in tech stocks and had fallen 1000 points or 3%, before reversing half of the loss. The Hang Seng is down nearly 2%, the Shanghai Composite nearly 1% with European bourse futures trading similarly. However, if one wants to see how risk is really rattled, cast an eye toward Bitcoin. It is down $5,000 (6.13%) already this morning and has fallen through $80k, a level not seen since November of last year. Lastly, and to round up the picture, Nvidia shares are down 8.48%, knocking nearly 3% from the Nasdaq 100. Investors rightly adopt defensive practices and lest we forget, and turmoil for thinking, we have been here before where a Friday tariff policy is completely undone come the following Monday. “Eyes down” is what Bingo callers command at the start of a new game, so does Donald Trump.

Using the same confrontation to achieve an extra advantage

It comes to something when even market observers wish they could open in debate other than the postulations of one certain Donald J. Trump. However, with an oil hat being worn, it does seem as if many of the chosen theatres of trade negotiation have much influence in the goings-on of energy. The US President is very noisy with Mexico, Canada, Russia, OPEC, Venezuela and Iran and while there maybe exceptions to this muse of a rule, nations involved in crude production and exports do seem to gain outsized Presidential attention. 

The closed and mutual pipeline relationship between the US and Canada means the northern neighbour has little room for manoeuvre in terms of negotiation. Where else can its most profitable export go? The much-vaunted green credentials of Prime Minister Justin Trudeau and indigenous lobby have successfully thwarted alternative pipelines that could make the coast.  ‘Energy East’ and ‘Northern Gateway’ aimed at pushing oil to either side of the huge country, fell afoul of the contemporary attitude and now only one destination remains.

Mexico is already experiencing export issues into the United States. Customers have been refusing to take some deliveries due to the poor condition of crude beset with contamination. Hit an already suffering Pemex with sanctions that all but kill petrodollar income leaves the President of Mexico, Claudia Sheinbaum, with more than just a headache caused by the issues of immigration, drugs and secondary China import/exports that attract the angry attention of the White House.

The Donald’s beef with Venezuela and Iran, so much an influence during Trump I, is rekindled afresh and the issues are little changed. Despite his promises to the contrary, Nicolas Maduro, conducted elections that were questioned not only by neighbouring countries but by the UN, whose observers reported electoral intimidation within Venezuela. There can be little doubt expediency was deployed by Joe Biden with oil prices in mind, but the new US chief has other plans. A similar pattern developed with Iran and the world’s need of its oil exports. Yet, there is little advance in the convening years for the nuclear talks and Mr Trump arguably has a particularly scornful place for Iran in his list of things to do. Iran’s exports of 1.5mbpd are way more important to the oil lanes of the world than that of the South American country, but both are even more important for their internal exchequers. Years and years of degradation in Venezuela and an isolated Iran with a military likely run haggard from the attentions of Israel mean both desperately need foreign exchange which without oil trading, for Iran anyway, could very soon be registering zero.

Russia turns up to a bizarre duet with the US over the future of Ukraine armed with over 10% inflation and 21% interest rates. The amount of GPD value spent on arms is 7% and to continue that style of funding requires its oil machine to be pumping to all and sundry at a rapid rate. Such ability is compromised with sanctions dripping from the hulls of its ‘dark fleet’. There can be conceivably no circumstance in which Vladimir Putin will pay heed to any war settlement without there being a lifting of oil sanctions.

As he stepped down from the inauguration pulpit, President Trump was urging his own oil industry to “drill baby, drill” and for OPEC to increase production. His interference in the Kurd/Iraq/Turkey pipeline standoff is playing out and there is likely to be resolution soon. It does seem that motivation to and involvement in centres of oil production is aimed at increasing output. The choices of not adhering to US wishes will see tariffs or sanctions run economies ragged. If Canada, Mexico and Iran cave and if Venezuela once again plays nice or at least pretends to; if Russia is gifted an appeasing Ukraine deal and OPEC+ put more oil to market, prices can move only one way. Lower prices are hardly attractive to a US oil sector that is much more interested in shareholder return rather than output, so why does there always seem a US geopolitical win might involve more oil availability in the world?
The sensitivity shown to Gasoline prices by US consumers is well recorded. Inflation after the pandemic and Ukraine invasion was hugely fired by the prices of energy. Yet, there is hardly a macro economist that does not think tariffs will eventually be inflationary. Is it then too much conjecture to offer a case in which a very aware Donald Trump is trying to make sure that when any global trade war, in whatever guise, provoking inflation into the US economy might just easily be mitigated by geopolitical encounters in which the US had already achieved its trade aims, with the added bonus of allowing existing global oil flow to continue? Making sure oil supplies remain loose is probably rather myopic in a counter-inflation play, but if this is an actual policy intent, there have been worse ones.

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