The spectre of a customs war returns (Daily analysis 3.12.2019)

The perspective of customs duties on imports of luxury goods from France to the USA worsens sentiment in the market. New comments by President Donald Trump during the NATO summit in London increase market uncertainty. The USA and China may not reach an agreement before the presidential elections in the United States. The zloty remains stable.

Trump's comments regarding the custom war

With no relevant macroeconomic data published today, market participants focused on geopolitical events. And there were quite a few of them. Today, Bloomberg reported that the French government threatened that the EU would take retaliatory measures if the US imposed tariffs on imports of luxury goods from France worth about 2.4 billion USD per year. The White House administration is not satisfied with how France wants to tax technology companies such as Amazon, Apple and Facebook.

In retaliation for this tax, the US could increase customs duties by 100% in the first months of 2020. Bruno Le Maire, French Finance Minister, said on Radio Classique that "it's not worthy of an ally, and it's not the behavior we expect from the US toward one of its main allies, France, and more generally, Europe". President Donald Trump repeated his readiness to impose duties on imports from France at a press conference this morning in London at the NATO summit, which is starting there.

Trump also commented on the possible agreement with China. The US President said that "you'll find out pretty soon". The most important statements for market participants seemed to be the ones in which Trump said that "there is no deadline" for concluding an agreement with China. He added that "the only thing that matters on China pact is if I want it". Donald Trump suggested that the conclusion of the agreement could last until the US elections are over in November 2020.

Information about customs duties on goods from France and comments received during the morning press conference worsened the sentiment on the market. The capital was flowing to a greater extent towards the so-called safe havens, i.e. gold and the currencies of Japan and Switzerland. On the other hand, contracts on stock exchange indexes and European indexes depreciated. The depreciation was important here, but the beginning of the week reminded market participants of the risks in international trade.

In recent weeks, the market has become convinced that, in the context of threats posed to international trade, the worst has already happened. Customs duties on steel imports from Argentina and Brazil, the prospect of not so distant customs duties on goods from France and the (potentially) distant trade agreement between the US and China reminded us of the risks of global economic growth. This may reduce the appetite for risk and the continuation of strong growth. On the other hand, it should be remembered that Donald Trump's comments and the actions of the White House administration are part of a strategy to negotiate more favourable trading conditions for the US. Therefore, it cannot be ruled out that the first phase of the agreement with China could be reached by the end of this year, which would most likely bring back market euphoria, at least in the short term.

The dollar did not react much to today's reports on French customs and Trump's conferences at the NATO summit. The dollar index (DXY), which measures its strength against six major currencies, remained close to yesterday's closing around midday. The EUR/USD exchange rates behaved in a similar way, which only marginally differed from yesterday's levels. After yesterday's unsuccessful attempt to fall below 1.10 and increase above 1.11, it seems that only Friday's report from the US labour market can take the quotations of the main currency pair away from the range of 1.10-1.11.

British issue

Minor changes in the dollar's value on the global market contributed to the stabilization of the zloty's basket, where - with exceptions - the changes were limited. The EUR/PLN exchange rate was quoted close to the 4.28 PLN boundary, i.e. at the lowest level in about two weeks. The exception was in the case of the pound in relation to the zloty. The GBP/PLN pair increased again above the 5.00 limit and trade was closed until midday in the range of approx. 5.00-5.03. This is the effect of the pound's appreciation on the global market: the GBP/USD exchange rate, commonly known as "cable", increased today slightly above 1.30, which is also the upper range of quotations from nearly seven previous months. As the UK parliamentary elections approach (December 12th), the pound's volatility range may widen.

There are no significant macroeconomic events planned for the rest of the day, so if we do not observe a significant deterioration of sentiment on the equity market (which could have a negative impact on the Polish currency), we expect that the zloty will stabilize.