Wall Street has most to lose from trust lost

A look at the day ahead in European and global markets from Wayne Cole

It’s been another day of pain in Asia with the Nikkei down 3% and a stomach-churning 9.6% for the week, the biggest drop since the pandemic hit in March 2020. Wall St futures started steady but have since slipped around 0.7% while European stock futures are off 0.3% to 0.6%.

The dollar is sitting on a weekly loss of 2.7% versus the yen and 3.0% on the Swissy, with the euro up 2.4%. So much for tariffs being bullish for the USD.

It should be no surprise that capricious twists in U.S. policy have investors fleeing in fear: If you launch an unprovoked trade war on allies and opponents alike with no clear goal except, seemingly, to extract money or favours, don’t be surprised when you’re not top of investors’ Christmas card lists.

As analysts have noted, for decades now global investors have allocated 70% of their equity cash to U.S. stocks, way above the economy’s 26% share of global GDP. If that preferred status is lost, say by starting a global trade war, money could well flow the other way.

The sums involved would dwarf any tariff boost to the dollar from the U.S. buying fewer imports, while squeezing foreign investors with unhedged positions on Wall Street – that’s most of them.

As for encouraging more capital investment in U.S. manufacturing, what firm would want to take the risk when the White House can change the rules on a dime?

If the idea is that these punishing tariff rates are just a bargaining ploy that can be moderated if countries pay enough to satisfy Trump, that merely underscores the problem. Unpredictability might be OK in game theory but not when you’re a company risking billions of dollars in a years-long investment decision.

Take Apple. Its supply chains are deeply embedded in Asia, where tariffs now range from 24% to 54%. Even if it could move some of its manufacturing to the States, a big ask, the resulting iPhones would cost multiples of what they do now.

Apple’s fat profit margins mean it’s better able than most to absorb some of the tariff hit in the near term, but it’s those Kobe beef-type margins that justify the stock’s stratospheric price rating.

And spare a thought for the Fed, caught between an almost certain spike in consumer prices and the mounting risk of recession as consumers and businesses cut back. Fed fund futures are up another 9 basis points for December today, implying 99 basis points of cuts this year. That’s a certain sign that markets think rising unemployment will trump (sorry) the pop in inflation and force the Fed to ease.