At 2 p.m. New York time the Standard & Poor’s 500 stock index was up 0.3%. The Dow Jones Industrial Average was ahead 0.22%. And the NASDAQ Composite index had inched higher by 0.27%.
Which is surprising given that the Group of 7 meeting ended Saturday with the United States isolated from its major trading partners and with Canada and the European Union promising retaliatory tariffs in response to U.S. levies.
It’s hard to estimate the effect of a tariff war on global trade or the U.S. economy–because a lot depends on the specific levels of tariffs and the specific basket of goods that they target.
The worst case scenario I’ve seen estimates that a significant global tariff war could wipe 2.4 percentage points off U.S. GDP growth. That would be enough to push the U.S. economy to the brink of recession.
I’m not looking, yet, for a trade war of that magnitude, but I do find the market’s willingness to look past the G7 meeting worthy of puzzling about–it’s not everyday that the the U.S. finds itself unable/unwilling to sign the usual vague post-meeting confirmation of motherhood and apple pie.
I can think of several reasons for this nonchalance.
The market might think that a successful summit between the United States and North Korea will compensate for whatever fallout there is from the G7 meeting. I think that could well be true on the U.S. political level where President Donald Trump’s ability to bring home a deal with North Korea would indeed probably overshadow any potential tariff war. But the economic impact of a deal with North Korea is negligible and any North Korea deal would still leave the global economy facing the impacts of any tariff war.
The market is being supported today by belief that next week’s OPEC meeting is likely to end with not much of anything in terms of an agreement about raising oil production. Saudi Arabia and Russia have, according to estimates, already raised production ahead of the meeting. That could well result in other OPEC members digging in their heels about changing official OPEC policy to increase production. The Energy Select Sector ETF (XLE) is up 0.79% today. West Texas Intermediate is 0.67% high and Brent crude has gained 0.35%.
The markets are so fixated on Wednesday meeting of the Federal Reserve’s Open Market Committee and the almost certainty that the body will raise interest rates, that investors aren’t paying attention to other news. Which includes, today, the report that Mexico, which isn’t a G7 member, is in talks with Japan about a bilateral trade deal to make up for any damage to Mexico from the failure of the current NAFTA talks. And don’t forget Friday’s meeting of the European Central Bank. There’s some thought that the bank may signal a date for ending its bond buying. That would be a huge deal for the euro and the dollar.
In other words, it’s not that the tariff war isn’t important–and way more important than most of this stuff in the medium term–but that Wall Street is focused on more near term news.