The latest crisis of the weekend was the announced tariffs on selected European countries for their decision to base a tripwire force in Greenland. Since Canada was not initially in the tripwire force, we were spared.
The most likely scenario appears to be that Trump is distracted by something else, and this trade war largely fizzles out — although last year’s trade deals may be victims. This appears to be a “I’m taking my ball and going home!” act by someone who is mad at an unexpected loss. However, everybody in Europe cottoned on to what the Canadian Liberals figured out last year (and the Conservatives most emphatically did not) — running against Trump on a nationalistic platform is an easy “I win” button for popularity. European retaliation could goad Trump, but given how he treated the U.K. since last year, rolling over is not a good strategy.
Regardless of what happens in Europe, this confirms that the upcoming renegotiation of the CUSMA (USMCA) free trade deal is going to be a disaster. My “optimistic” scenario is that both sides scream at each other, make threats, and just punt the ball so that we can preserve the status quo and repeat the process in 2027. The difficulty of the negotiation might mean that the three-country format of the trade deal might end. The prospect of an Albertan secession referendum also poses potentially serious political risks.
There has been chatter about “What if Europeans sell Treasurys?” (again). This reaction is to be expected — the financial media prints “Potential Catastrophe in the Government Bond Market?” every two weeks. This is not just political bias — we have plenty of empirical confirmation that the only articles about the bond market that are widely read discuss potential catastrophes. Only a statistically insignificant minority reads “Govvies will trade in a 50 basis point range over the next 12 months” articles.
Instead, a potential divestment for USD assets would hit risk assets and the U.S. dollar. Given the uncertainty around risk asset pricing, it is unclear how useful that information is.
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