In 2018, President Trump’s tweets on international trade have led to bouts of market volatility and concerns of a global economic slowdown. Against this backdrop, Franklin Templeton Multi-Asset Solutions’ Matthias Hoppe explains why he thinks economic fundamentals will determine the fate of the global economy more than Trump’s words will.

Background

In recent months, President Donald Trump has imposed import tariffs on long-standing US allies, including Canada, Mexico and the European Union (EU). He’s also enacted tariffs on a growing list of products from China.

As the chart below shows, the two US neighbors—and the EU—have been the largest US trading partners over the past 10 years.

Trump Tweets and the Stock Market Trembles

The communication channel for Trump’s thinking on trade issues always seems to be the same: Twitter. The impact of his recurring threats to raise even more customs duties on even more goods from abroad are felt not just on stock markets but across the full gamut of financial markets.

As soon as Trump tweets about punitive tariffs, US stock indexes often fall or rise, bond yields typically move, sometimes the US dollar depreciates or gains in value in one day. No wonder investors seem disorientated.

Despite the volume of headlines, Trump’s Twitter pronouncements haven’t done too much damage to global stock market performance overall this year—at least not yet. On the other hand, some emerging-market asset classes, particularly currencies, have been volatile as the world’s second-largest economy—China—has responded with tit-for-tat tariffs.

As the chart below shows, emerging-market currencies, as measured by the JP Morgan Emerging Markets Currency Index1, fell about 7% in the first half of 2018.