By Henry Peabody*
The Trump administration’s plans to impose tariffs on imported steel and aluminium will have big-picture consequences in the macroeconomic and geopolitical environment that we – at Eaton Vance – believe will impact interest rates, inflation and currency markets.
In my mind, actions such as these tariffs are inherently inflationary, and generally negative for growth. They are also a reminder of how protectionism and populism are revealing the inward-focused posture of global politics.
The tariffs are one of several developments and data points in recent days have caught our eye. First, both Russia and Turkey have increased gold reserves substantially, with the former exceeding China’s holdings. Second, we’ve seen headlines around reduced demand for U.S. debt, and an unwillingness to own it on an unhedged basis.
Aside from the U.S. tariffs, there has been an uptick in populism and nationalism in the form of trade restrictions, and a move in China to end presidential term limits. We believe these are developments that investors should pay attention to.
What does it all mean? For now, we think we may be in the midst of an inflection point. Aside from what could be the start of a trade war, we also have an ongoing major shift from monetary policy to the current fiscal push.
Meanwhile, the tone of discord seems to be getting a bit louder. The convergence of all these shifts causes anxiety among many investors, and we are seeing it in markets. It should also contribute substantially to volatility in the markets as we question past relationships, correlations and models that we have grown accustomed to.
So, what do we do about it? First, stay focused on the long term. We think about inflation and a world that may not be organized around US-centric institutions and finance. For example, we like some emerging markets for their growth, and expectations of a continued weaker trend for the US dollar. We also are focusing on opportunities in select global bonds.
The US tariff announcement is notable, political theatre aside. Solar panels and washing machines are one thing — large scale industrial metals are another. Fewer dollars being sent overseas is another liquidity draining event, on top of the global removal of central bank quantitative easing (QE). Those with dollar liabilities will need to source liquidity, which may result in a temporary imbalance of supply and demand.
Most importantly, we think investors should be prepared for opportunities. The Federal Reserve is removing the conditions that allowed for low volatility and carry trades to prosper. What worked so well recently may not continue to work in the future.
In periods of increased anxiety and volatility, those who maintain a long-term view and dry powder in the form of cash can capitalise on the liquidity needs of those who do not. This may be one of those times.
*Henry Peabody is a diversified fixed income portfolio manager at Eaton Vance.