X US Steel Corp

By Ira Iosebashvili and Akane Otani 

Escalating trade tensions are rattling markets as a new round of tariffs raises investors' concerns about everything from U.S.-China relations to the fate of the North American Free Trade Agreement.

The mounting strains left investors struggling to understand the sweeping ramifications of those conflicts, including their impact on economies, interest rates, inflation and stock valuations. President Donald Trump approved tariffs on about $50 billion of Chinese goods Friday, prompting Chinese officials to hit back with tariffs of their own.

The moves, which investors said exacerbated fears that the world's two biggest economies could descend into a full trade war, buffeted government bond yields and shares of agricultural and industrial companies that could suffer under tighter trade policies. Caterpillar Inc. slid 2%, while farm-machinery maker Deere & Co. lost 1%, Boeing Co. fell 1.3% and United States Steel Corporation declined 4.2%. Declines in industrial heavyweights pulled the Dow Jones Industrial Average to its biggest one-week slide since March.

Now, investors are debating whether financial markets that had already been struggling for momentum this year will be able to shake off an increasingly uncertain outlook for global trade and growth.

While the U.S. economy continues to exhibit signs of strength, investors and analysts say they are concerned about the rise of restrictive trade policies because so much activity depends on cross-border transactions. The feud over Nafta poses a particularly acute manifestation of those fears. Mr. Trump, who has threatened to withdraw entirely from the accord, removed the U.S. from the Trans-Pacific Partnership as one of his first official acts in office.

The move "would be a strong signal to the global community that the U.S. is really embracing the America-first agenda," said Mark McCormick, North American head of FX strategy at TD Securities. "That's probably bad for globalization, bad for equities, bad for risk."

Any signs that the deal might be replaced with bilateral agreements between the U.S., Canada and Mexico would likely soothe investors and take the edges off market moves, analysts said. On the other hand, emerging-market currencies, commodities prices and Mexican and Canadian assets could slide if it appeared that the Nafta conflict was the prelude to an all-out global trade war.

Many investors and analysts fear that a U.S. withdrawal from Nafta could further hamper a U.S. stock market that has struggled to gain ground this year, denting profits for companies that produce and export automobiles, agricultural goods -- including corn, soybean and beef -- and industrial machinery.

Through Nafta, U.S. car manufacturers like Ford Motor Co. and General Motors Co. have been able to shift production to Mexico, where wages are typically lower. Some economists argue that without access to lower-cost production hubs, the U.S. auto industry could lose ground to competitors in Asia. The disruptions could also cause foreign car makers to rethink their investments in U.S. production facilities.

"These sort of linkages, which have given U.S. auto makers an advantage in relation to China, would be much more difficult without NAFTA's tariff reductions and protections for intellectual property," a 2017 analysis by the Council on Foreign Relations said.

Shares of agricultural and industrial firms could also take a hit. The U.S. exported $43 billion worth of prepared food, vegetables, fruit and other food and beverages and $85 billion worth of machinery to Canada and Mexico last year, according to federal data. Withdrawal from Nafta could squeeze profit margins at companies like Constellation Brands Inc., which brews Corona and Modelo beer in Mexico, as well as agricultural giants like Archer Daniels Midland Co.

More broadly, some fear a U.S. exit from Nafta could trigger tit-for-tat trade measures that weigh on an even wider range of industries.

"Even if it ended up being replaced with something better for the U.S., that would take time, which adds to uncertainty among investors," said Karyn Cavanaugh, senior market strategist at Voya Investment Management, who added that she would expect an immediate pullback across the stock market.

Uncertainty over Nafta has already taken a toll on Mexican and Canadian markets. Stocks in both countries have stagnated this year, along with the S&P 500, which remains below its all-time high hit January. The Mexican peso is down 4.7% against the dollar this year, while Canada's currency has fallen 4.6%.

Alan Robinson, global portfolio adviser at RBC Wealth Management, said his firm now sees a 25% chance that Nafta negotiations will fail, up from 10% earlier in the year. Analysts at Toronto-based Gluskin Sheff + Associates believe there is a 40% chance the deal will fall apart and be replaced with bilateral agreements.

"Do we assume cooler heads prevail? You try to be optimistic, but we're talking about human beings here and human beings make mistakes," said David Rosenberg, chief economist and strategist at Gluskin Sheff.

(END) Dow Jones Newswires

June 17, 2018 10:14 ET (14:14 GMT)

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