Tariff Turmoil: 3 Orders of Impact on Banking

Something unusual played out in the US financial markets when the US President shocked the world by deploying tariffs as a weapon of mass destruction of trade. Equity markets tanked, as expected. Bond prices went down and so did the USD, which defied all logic. A risk aversion towards equities signifies a flight to the perceived safety of US bonds. Bonds and USD should have strengthened. Even the Treasury Secretary of the US anticipated the same. The market, however, had other plans. Welcome to the world of chaos.

- By P. Krishnan, CEO & CIO, Spark Asia Impact

What transpired signalled a centennial shift in US priorities.

Source: U.S. International Trade Commission, Spark Fund Research

US, which spearheaded the liberal multilateral trading system, is abandoning the same. This comes amidst uninspiring global growth and debt dynamics. It is quite probable that the US will unwind a lot of the unilateral levies that it imposed on its own imports. But something has changed for good. The behavior of bonds and USD that we saw in Apr exemplifies faltering faith in US asa safe haven. Consequences will follow.

1ST ORDER IMPACT ON INDIAN FINANCIAL MARKET

Indian banking sector is largely insulated from the tariff shock. It is a closed system of domestic savings and lending. Banks may be affected by potential stress on loans emanating from impact on exporters. If tariffs imposed on competitors in trade are similar or higher, the relative impact is muted or even positive. In garments and electronics, the positive impact is already visible as new arterial routes emerge in the supply chain. India is in the leaderboard of nations that could close out a trade deal with the US. So far, so good.

2ND ORDER IMPACT - CAPITAL FLOWS