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Wednesday, January 22, 2025

Brent – WTI Spread Trade

تم إعداد هذا المنشور من قبل سنشري للاستشارات

Brent – WTI Spread Trade
Coldplay

TRIPLE T – TRUMP TARIFFS THREATS

Vocal in his “America First” protectionist stance, Trump has proposed many policies that could fragment global trade networks while impacting America’s relationship with key trade partners.

For starters, Trump has threatened to levy up to 60% import tariffs on Chinese goods and between 10% and 20% on imports from other countries to safeguard domestic manufacturers and industries. This could also incentivize foreign manufacturers to set up business in the U.S. as a legal way to circumvent import duties. However, this could spark a wave of retaliatory tariffs, potentially triggering trade wars worldwide and a subsequent rise in inflation.

Canada and Mexico are also top U.S. targets for 25% import tariffs. Nearly one-third of automobiles sold in the U.S. and priced under $30,000 are Mexican-built. According to the Mexican Association of the Automotive Industry, approximately four million vehicles are manufactured yearly in the over 20 assembly factories in Mexico. Roughly 70% of these vehicles are shipped to America. As such, import tariffs could unravel the free trade agreement negotiated by Trump during his first term and raise the average cost of every car sold in the U.S. by an estimated $3,000.

Meanwhile, Canada’s trade surplus with the U.S. is predominantly driven by crude oil exports. Certain American refineries are specifically designed to process Canadian crude, and unlike manufactured goods, crude oil cannot be easily redirected due to Canada’s fixed pipeline infrastructure. This dependency creates a bilateral monopoly, restricting flexibility for both parties. Canada has limited alternatives for exporting its crude, and some American refineries have few options for sourcing crude from elsewhere. Consequently, tariffs could make matters difficult for both countries. ‘America First’ Protectionist Policies

Trump is also outspoken in his resolve to tackle the issue of illegal immigration, vowing to deport millions of illegal migrants from the U.S. This could potentially tighten the labour market by lowering the supply of workers. Trump’s pro-energy policies bode well for domestic oil and gas companies. Trump’s transition team is working on a comprehensive energy package that would support increased drilling in the U.S. and expedite the approval of export permits for new LNG projects.

Moreover, Trump is a strong advocate of corporate tax cuts, intending to lower them from 21% to 15%. This is beneficial for all companies, but most of all, smaller companies with significant domestic revenue exposure. While this could boost the profit margins of smaller companies, it will lower federal revenue from tax collections, particularly when the U.S. is grappling with a massive budget deficit, which is adding to the nation’s debt burden.

Due to his staunch support for deregulation, banking, cryptocurrency, and fintech sectors stand to benefit from Trump’s administration. Trump strongly favours digital assets and cryptocurrencies. As such, a new SEC Chair will be appointed in January 2025, following pro-regulation Gary Gensler’s resignation in November 2024. Trump nominated pro-crypto businessman Paul Atkins as Gensler’s replacement. This move propelled Bitcoin above $100,000 for the first time, extending the rally sparked by Trump’s victory in the presidential race. Atkins is known to have offered guidance to cryptocurrency companies on risk management and compliance programs, while also advising traditional financial institutions on navigating the emerging markets for digital assets. Under Atkins’s potential leadership, the crypto community anticipates clearer guidelines distinguishing digital assets as securities or commodities, along with approving more exchange-traded funds that include smaller and riskier cryptocurrencies.

Stringent regulatory oversight can hinder innovation, particularly in sectors like fintech. Deregulation could lower entry barriers while curtailing compliance costs for fledgling and well-established ventures in the fintech space. It could also attract foreign investment, providing companies with the necessary capital to expand their offerings. Banks are also expected to benefit from deregulation, giving these financial institutions greater autonomy over how they wish to deploy their capital. For instance, it will enable them to invest in securities without inviting excessive scrutiny. It will also grant them more flexibility to develop new financial products and services, which could ultimately enhance competitiveness on an international scale.

Deregulation could also stimulate economic activity and make it less cumbersome for banks to lend money to businesses and consumers. Furthermore, it can create an environment conducive to more excellent M&A activity.

The resilience of the U.S. economy, in conjunction with the potential for Trump’s policies to reignite inflationary pressures, has compelled the Federal Reserve to adopt a more cautious stance in 2025. The central bank has already revised its inflation forecast upward and has signalled 50 bps of monetary easing next year, as opposed to 100 bps anticipated earlier. This could benefit banks as higher interest rates translate into greater Net Interest Margins (NIMs).

Although higher interest rates may not be favourable to other sectors, Trump’s proposed policies are expected to be the dominant catalyst for strong performance in sectors like cryptocurrencies, fintech, and small-cap companies.

THE DOLLAR STORY

Dollar bears have taken a hit this year, while FX markets forecast continued strength for the greenback. Multiple factors contributing to a 7% gain for the currency against a basket of peers this year, including a Trump victory, relatively robust U.S. economic growth, and rising Treasury yields, are expected to continue supporting the dollar going into next year.

A Trump win is expected to strengthen the dollar’s bullish momentum

A Trump trifecta victory has further boosted the US dollar and is expected to continue, given his aggressive and protectionist policies. Trump has advocated for a weaker U.S. dollar to boost U.S. export competitiveness, but the proposed policies will likely make it stronger.

In Asia Pacific, economic growth is expected to remain the highest among EMs despite slowdowns in China and India. Meanwhile, Southeast Trump’s major policy mandate is to introduce a 10%- 20% broad-based tariff on all trading partners and an additional 10% tariff on China. Given that tariffs are inflationary, it is expected to be bullish for the dollar. However, a short-term pullback can be seen if tariff policies are not outrightly implemented. As seen historically, when Trump won the elections in November 2016, the dollar was up 4% over the month. However, it experienced a drop over the next eight months as tariff implementations were delayed. Similarly, the dollar has rallied 5% since Trump’s re-election in November 2024. But if history were to repeat itself and tariff implementation is delayed, the greenback could experience a correction when he takes office in January 2025 as long dollar positions unwind. Further, his policy of limiting immigration would reduce labour supply by 7%-8%, increasing hiring costs and inflation, which is positive for the dollar. Although the implementation and effects of this policy will only be felt by 2026.

Trump also plans to cut taxes from 21% to 15%. If this is done without cutting down on spending, it could increase the already large fiscal deficit and, in turn, increase inflation, reducing the Fed’s ability to cut rates, benefiting the dollar.

Interest rates and their effects on the dollar

Earlier this year, investors expected the Federal Reserve to cut interest rates by 25 basis points in September. But they were surprised when the Fed cut rates by 50 basis points, the first big cut in four years, because the job market was slowing down and inflation was falling. In November, the Fed cut rates again by 25 basis points.

In December, the Fed cut rates by 25 basis points once more, bringing the target rate to 4.25% to 4.50%. This signals that the economy is getting closer to the Fed’s goals of maximum employment and stable prices. However, the Fed is being more careful now with rate cuts and plans fewer cuts in 2025 than expected due to stickier inflation concerns, which could be suitable for the dollar.

The Fed also updated its economic outlook, predicting more substantial growth in 2025 and lower unemployment. However, they raised their inflation forecast from 2.2% to 2.5%, expecting it to stay slightly higher than their target of 2%. Inflation in November was still above their target, so the Fed will likely hold off on cutting rates at their January meeting.

2025 Outlook

To conclude, the outlook for the dollar appears quite positive heading into next year. However, a short-term pullback is likely on the cards should there be a delay in executing Trump policies beyond Q1 2025.

Further adding to the bullish momentum is the Fed's slowing down of rate cuts from four to two in 2025.

The Fed Funds Terminal Rate for next year has increased from 3.4% to 3.9%, indicating that yields and the dollar are expected to stay elevated.

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