Tariffs Dominating Headlines, but NOT Markets


Trade policy concerns are again on the rise, but financial markets are thus far refusing to react. Implied volatility remains low and asset returns are not yet showing a strong connection to tariff-induced headlines. 


The chart below shows Google search trends (global) for policy concerns ranging from national security to central banks. Trade policy shown in green has clearly risen to the greatest policy concern, while monetary policy remains quite tempered.



Tariff headlines are again on the rise as a so-called ‘trade war’ begins between the U.S. and China. The next chart shows rolling one-month story counts including tariffs and each product type. Steel and aluminum kicked off trade war fears in early March 2018, but additional products like autos, industrials, oil, and agriculture are now sharing the limelight. 



But, implied volatility across asset classes is lethargic at best given all the headlines and hyperventilation on major T.V. news networks. Pockets of volatility are found like emerging market currents (Brazilian real and Turkish lira), but on the whole jitters are low.



The recent surge in tariff announcements and headlines are having a seemingly negative impact on capital goods, transportation, energy, and bank sectors. The chart below shows current three-month correlations between each S&P 500 industry’s return and tariff-related news trends. 



The bigger worry should be any impact on what were strong capital expenditure plans. The chart below shows the average survey (black line) rolling over after reaching the highest since early 2006. 



The U.S. dollar and WTI crude oil are the most negatively correlated to rising tariff headlines. On the flip side, emerging market equities have yet to see a direct connection to tariffs. Hawkish central bank rhetoric likely is having a larger impact (for now) on emerging market currencies and equities.