News of the week summary - 16/03/2025
US-EU trade war escalates
The United States and the European Union have reignited a trade war centered on tariffs on metals and alcohol, threatening industries on both sides of the Atlantic. The dispute began when the U.S. imposed tariffs on steel and aluminum imports, prompting swift retaliation from the EU, which announced duties of up to 50% on American whiskey and other goods. In response, former President Donald Trump has threatened a massive 200% tariff on European alcoholic beverages, including French wine and champagne, potentially dealing a severe blow to Europe's luxury drinks industry.
Tariffs are essentially taxes on imports, designed to make foreign goods more expensive and thereby protect domestic industries. However, they often lead to countermeasures from trade partners, escalating into tit-for-tat disputes that can disrupt global supply chains, hurt businesses, and raise prices for consumers.
The immediate market reaction has been negative, with shares of major European beverage companies such as LVMH, Pernod Ricard, and Heineken all experiencing declines following Trump’s tariff threat. Given that U.S. whiskey exports to the EU had already suffered significantly under similar tariffs in Trump’s first term—falling 20% between 2018 and 2021—companies on both sides are bracing for renewed economic damage.
Beyond alcohol, the EU has expanded its retaliatory measures to include a wide range of U.S. goods, from jeans to Harley-Davidson motorcycles, affecting industries well beyond the initial dispute over metals. Canada has also joined the fray, imposing tariffs on nearly $21B billion worth of U.S. goods and filing a complaint with the World Trade Organization.
This came after the US imposed a 50% tariff on steel and aluminum imports on its northern neighbour. The move, which Trump claims is a response to Ontario’s 25% surcharge on power exports to the U.S., has sent metal prices soaring and stocks plummeting.
Ontario Premier Doug Ford announced that the province would suspend the electricity surcharge following what he described as a productive conversation with U.S. Commerce Secretary Howard Lutnick. Talks between U.S. and Canadian officials are set to continue in hopes of negotiating a new free trade agreement. However, Canada’s incoming prime minister, Mark Carney, has vowed to retaliate, stating that his government will ensure any response maximizes its impact on the U.S. while minimizing harm to Canada. Trump has also threatened to impose additional levies on Canadian auto exports if Canada does not drop what he called its “long-time” tariffs. He claimed such measures would “essentially shut down” Canada’s auto sector, which heavily relies on the U.S. market.
US junk bonds under pressure
Investor sentiment toward risky corporate debt has soured as Donald Trump’s aggressive trade policies fuel concerns about slowing U.S. economic growth. The cost of borrowing for junk-rated companies—firms with lower credit ratings due to higher default risks—has risen sharply, with the spread between U.S. junk bonds and government bonds widening to a six-month high of 3.22 percentage points.
Junk bonds, also known as high-yield bonds, offer higher returns to compensate for the increased risk of default. When investors worry about economic instability, they demand higher yields to justify lending to riskier companies. The recent rise in junk bond spreads signals growing uncertainty, as fears of a U.S. recession and unpredictable tariff policies rattle financial markets.
Stock market turmoil has further weighed on the junk bond market, with sharp declines in high-profile tech stocks like Tesla and Palantir dampening investor appetite for risk. The S&P 500 and the Nasdaq Composite have both fallen by around 6% this month, their worst performance since 2022.
Despite Federal Reserve Chair Jay Powell’s reassurances that the economy remains strong, analysts at Goldman Sachs have raised their forecast for junk bond spreads, anticipating a rise to 4.4 percentage points by the third quarter—significantly higher than their previous estimate of 2.95 percentage points. This suggests growing expectations of economic deterioration.
Investment-grade corporate bonds, typically seen as safer bets, have also faced selling pressure, with their spreads rising to the highest level since last September. The widening credit spreads across both high-yield and investment-grade bonds indicate that investors are increasingly cautious, worried that trade tensions and economic slowdown fears could lead to financial stress for businesses reliant on debt markets.
Trump’s oil price dilemma
Donald Trump’s push for lower oil prices—targeting $50 per barrel or less—has sparked concerns over its unintended consequences for the U.S. energy sector. While cheaper crude could reduce consumer costs and curb inflation, it threatens the financial viability of the very industry Trump seeks to expand.
During his campaign, Trump idealized gasoline prices at $1.87 per gallon, equating to roughly $20 per barrel for crude. Recently, his trade adviser Peter Navarro suggested that a $50 oil price would help fight inflation. However, industry analysts argue that such a low price could stifle U.S. oil production, making Trump’s dual goals of cheap energy and domestic expansion incompatible.
The U.S. has become the world’s largest oil producer, pumping over 13 million barrels per day, largely due to the shale boom. But most shale producers require at least $45 per barrel to break even, meaning a prolonged drop to $50 would force production cuts. Analysts warn this would ultimately benefit OPEC and Saudi Arabia, which could regain market control and push prices higher in the long run.
The administration’s regulatory easing aims to lower costs and encourage drilling, but Trump’s tariffs on materials like steel and aluminum are making operations more expensive. This contradiction has left many oil executives uneasy. At a recent industry gathering, officials publicly cheered pro-energy rhetoric, but behind closed doors, many voiced concerns over unpredictable policymaking and the risk of crashing oil prices.
While Trump may call on OPEC+ to increase output, major producers like Saudi Arabia and Russia are unlikely to let prices fall to $50 without intervention. Saudi Arabia needs oil closer to $100 per barrel to balance its budget, and Russia relies heavily on oil revenue for its war efforts.
Ultimately, Trump’s push for lower energy costs presents a double-edged sword: it could provide short-term relief for consumers but risks undermining U.S. energy independence and handing market power back to OPEC in the long run.
US inflation eases to 2.8%
U.S. inflation cooled more than expected in February, dropping to 2.8% from 3% in January. The decline has fueled optimism that the Federal Reserve could cut interest rates later this year, as markets now price in up to three rate reductions.
The softer-than-expected inflation reading comes amid concerns that President Donald Trump’s aggressive economic policies—particularly tariffs on key trading partners—are slowing growth. The rollout of these tariffs has been marked by abrupt shifts, unnerving businesses and financial markets.
Despite the cooling inflation, Fed Chair Jay Powell remains cautious. He signaled last week that the central bank is in no rush to cut rates, maintaining its 4.25%-4.5% target range for now. Powell emphasized the Fed's focus on distinguishing “signal from noise” as economic conditions evolve.
While February’s inflation dip is a positive sign, economists caution that it may be too soon to declare victory. The full impact of tariffs has yet to be reflected in the data, meaning inflation pressures could resurface in the coming months.