Europe Could Be Next Target of Trump Twitter Tirade, says Royal London’s Greetham

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- Trump so keen for lower rates he may start trade war with EU.

- Europe could be next target on Trump radar, says Royal London.

- EUR would fall with emerging market currencies, USD would rise.

The current rebound in risk appetite may not last if President Donald Trump stirs up trade trouble in order to persuade the Federal Reserve (Fed) to lower interest rates, according to Royal London Asset Management.

Trevor Greetham, head of multi-asset strategy at Royal London, says the White House may seek to stir up trade tensions with new targets, potentially including the European Union, in order to put pressure on the Fed to cut interest rates. Trump has repeatedly complained that rates are too high, making it more expensive for companies, consumers and the U.S. government to borrow. 

At the start of August the market had expected the Fed to cut rates with 100% probability in September, as they thought the central bank had not fully factored in the threat to the U.S. economy of tariffs and the global slowdown, but since then the probability has fallen to 86.5% as economic data has not been as bad as forecast and trade tensions, especially more recently, have eased.

“I am very struck by the fact that stocks are at an all-time high in the U.S. and we are all saying that maybe things are OK. Maybe the Fed doesn't need to do 50 basis points next week. Someone in the White House will pick up these signals and I am quite worried that we will get a real bombshell from Trump on trade, because he really wants that 50 basis point rate cut,” Greetham says, in an interview with Bloomberg News. 

Above: Euro-to-Dollar rate shown at daily intervals.

The fund manager uses the example of how Trump purposely shook things up after the Jackson Hole symposium, hitting out at Chairman Jerome Powell for not yielding to his calls for immediate and significant reductions to the Fed Funds rate, before raising the tariff rates applied to some imports from China in retaliation against a similar Chinese move that was itself a retaliation for an earlier U.S. decision to impose fresh levies. 

“The tweet he sent out immediately after the Jackson Hole speech, at which he said “you think the economy’s ok what and see what I’ll do” and then we got the China tariffs,” Greetham says. "Next, it will be Europe which is in the cross-hairs because you can imagine him seeing that the sort of ECB cuts rates even more negatively, and he wants negative interest rates too, we know...So he might start saying the Europeans are being unfair, I’m going to get them on tariffs.” 

Given the Europeans keep cutting interest rates as evidenced by the 0.1% cut to the deposit rate at the European Central Bank (ECB) September meeting, there is a risk Trump may take aim at the continent in his next tariff policy decision. He already dedicated at Twitter trade tirade to the ECB. A genuine risk remains that Trump may go from criticism to opening up a trade war with Europe. 

European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.... And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!

— Donald J. Trump (@realDonaldTrump) September 12, 2019

President Trump ‘magnanimously’ delayed the implementation of tariffs - both from September to December in August, and more recently - from the start till the middle of October. China reciprocated by lifting its ban of U.S. agricultural products and since then global risk appetite has rebounded. 

“I think there is uncertainty over whether Trump, or whether the ‘eye of Sauron’ is going to switch to Europe instead of China, and I think there is a real genuine risk that that is going to happen,” says Jamie Rush at Bloomberg Economics.   

If the U.S President increases trade tensions with Europe it would weaken the Euro which would probably plummet versus the U.S. Dollar as the Yuan has done in the case of China. Other currencies which would probably weaken include emerging market FX which tend to decline when the U.S. Dollar rises since much EM debt is denominated in Dollars making repayments more burdensome for corporations  when the Dollar is strong. Safe-havens such as the Yen and Swiss Franc would rise in that scenario.

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