There are two big news items in global financial markets this week: international tariffs and European government changes. Both of these events could have implications for the TSP through the rest of the year.
Tariffs and Retaliation
Months ago, the President Trump announced tariffs on imported steel and aluminum, but gave Mexico, Canada, and the European Union a temporary pass while negotiations played out.
That pass ended late last week, resulting in the tariffs being imposed on these close US allies. As a result, Mexico, Canada, and the European Union all announced the intention to impose retaliatory tariffs on roughly the same value of US exports.
So far, the dollar amounts involved are not enough to have major effects on the national economy, although certain sectors are affected more than others. But some analysts fear that this could result in further tariffs from the United States, which would likely result in additional retaliatory tariffs from these other nations, which could reduce global trade, isolate the United States from its allies, and impact all economies involved.
It remains to be seen whether this is the end of additional tariffs, and what level of impact these tariffs and further negotiations may have on the U.S. trade deficit that President Trump’s administration is aiming to improve.
The risk is a broad negative impact on international trade, economic production and jobs. The upside potential is that if the Trump administration creates new trade agreements that are favorable, the US may trim its trade deficit, which generally benefits a country’s currency exchange rate and domestic economic production – which could buoy share prices generally, including C Fund holdings.
Italy’s New Government
Italy spooked global markets over the past couple weeks, but then partially smoothed out those concerns, although not without creating uncertainty for I Fund returns that bears watching.
In March, Italy held elections that resulted in a lack of clarity. Out of the three major parties, none of them won a clear majority, resulting in a hung Parliament for months.
The two most successful parties in the election, the center-right League and the popularist Five Star Movement, were in talks to form a coalition government. But last week this possible coalition appeared to be at risk when Italy’s president refused to accept the coalition’s proposed finance minister due to the proposed minister’s stance against the shared Euro currency. A market sell-off in global equities followed, due to concerns that Italy may need additional elections to resolve this uncertainty.
However, late last week, after re-arranging some of their government picks, the President accepted the coalition’s new government administration with a different finance minister. This cooled investors’ immediate concerns about government instability, but long-term concerns linger.
Spain’s New Government
Further complicating the politics in the European Union, the Spanish prime minister was forced out of office days ago by Spain’s parliament in a no confidence vote due to a major corruption scandal in his political party.
His main political opponent was appointed the new prime minister, but his hold on power remains shaky as his party only controls about a fourth of Spain’s parliament.
For the I Fund: Sovereign Debt Concerns
Readers may remember the European sovereign debt crisis that plagued global markets from about 2010 to 2012. Many investors are concerned that Italy and Spain may re-heat some of those concerns, since the core problem was never fully addressed.
At the heart of the issue was the fact that multiple European countries now share a single currency: the Euro. They have agreements to keep their debt levels at reasonable levels, but some nations have far exceeded those levels.
Most countries, like the United States and Japan, control their own currency. If national debt goes too high, they can theoretically inflate their way out of the problem instead of defaulting. And other countries don’t have any say over their national budgets since they have no stake in the matter.
But with a shared currency, individual countries are tied to the fates of other countries in the Eurozone. A debt problem in one country can carry over to the whole system.
Right now, Italy has one of the highest debt-to-GDP ratios in the world, and it’s the third-largest economy in the Eurozone:
Debt-to-GDP Ratio for Major European Economies (%)
The UK was never a part of the shared Euro currency, and is now leaving the European Union as well. But Germany, France, Italy, Spain, the Netherlands, and a host of other Eurozone nations, face difficult challenges ahead from some of the most indebted countries that use the shared currency, with Italy being the biggest one.