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After a period of peace, US President Trump's hard-lined trade stance has reared it's head again which is spooking risk sentiment currently.

  • Asian stock markets are in the red at present.

First salvo

  • The first salvo came with the US-Canada trade spat which was quickly followed by mixed signals out of the Trump administration regarding the NAFTA accord.
  • According to a Washington Post report of it's interview with President Trump yest, it said that he was all set to announce a withdrawal from NAFTA this Sat before being advised against it by Commerce Sec Ross and Treasury Sec Mnuchin amongst others including apparently hundreds of biz execs.
  • On the flipside, advocates of a withdrawal were trade adviser Navarro and chief strategist Bannon.
  • At this point in time, the White House is pursuing a path of renegotiation to NAFTA, but Trump isn't ruling out a pull-out ahead.
  • We would take pains to highlight the fact that the balance of the equation would leave American exporters negatively affected by a NAFTA withdrawal given the size of the markets involved, while consumers would also face higher prices, which will serve as a drag on the US economy.

We have also just seen Trump play hard ball with S.Korea and Saudi Arabia

  • He said in a Reuters interview that the US has a "horrible" trade deal with S.Korea as evidenced by the big trade deficit, and that he wants to either renegotiate or terminate the free trade pact.
  • He also stated that he wants S.Korea to pay for the THAAD deployment.
  • On Saudi Arabia, he took offence to it not paying it's fair share for US defence.

Has Trump miscalculated the implications of a govt shutdown?

Last but not least, Trump has come out with all guns blazing as the US continuing spending resolution expires today.

He said his administration is prepared for a US govt shutdown if it so happens, which we think is a very dangerous stance to adopt.

If history has taught us nothing, it should at the very least show the paralysis wrought by the shutdown in 2013, the negative impact it had on domestic sentiment (according to polls conducted in the aftermath, 81% of Americans disapproved, 86% felt it damaged America's image, 53% held the Republicans accountable), and the sharp (albeit short) drop in econ growth.

While growth ultimately rebounded from Q1 2014, that was with the safety net of Fed stimulus.

With the Fed already gradually removing the punch-bowl, the question is why take that risk when there's already been a slowing of US growth momentum from the start of 2017.

In the face of the evidence above, we think that Trump has miscalculated on this front and we see any govt shutdown (however brief) as a s/t negative.

Possible market impact?

Taken in context, we see a govt shutdown scenario stoking cross-winds in USTs.

  • On one hand, there will be a knee-jerk sell-off but the corresponding risk aversion would limit any such move.
  • From there, we suspect the market will then train their crosshairs onto the implication for Fed policy, and conclude that they won't be able to hike 3 times this yr.
  • Note our long-held viewpoint is for 2 hikes in 2017.
  • As such, in the mid-term, we still hold a market contrarian viewpoint of lower UST yields.

With this, the corresponding implication would be further USD weakness. JH

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