US trade war could trigger more expansionary monetary and fiscal policies globally

The ongoing US trade war might push global economies to tweak their monetary and fiscal policies to account for tariff shocks, Fitch Solutions said. Last week, US President Donald Trump imposed 25% tariffs on Canada and Mexico and doubled tariffs on Chinese imports to 20%. He also announced plans to apply 25% tariffs on EU imports, and plans to place additional 25% tariffs on all steel and aluminum imports starting this week.

It’s all about inflation and interest rates: To counteract economic slowdowns caused by tariffs, central banks may consider lowering interest rates, but their ability to do so varies across countries. The flexibility of monetary policy depends on how closely inflation aligns with targets and whether interest rates have room for adjustment compared to pre-pandemic levels.

Where do developed economies stand? The European Central Bank and central banks in Australia and Canada may have more capacity to cut rates due to inflation remaining near target. The US and UK stand in a middle position, with some ability to adjust rates but with inflation concerns potentially limiting aggressive reductions. Japan, facing an inflation rate of 4%—double its target—and a minimal policy rate spread, has little room for monetary easing. Meanwhile, China’s policy rate is already far below its 2015–2019 average, significantly reducing its ability to introduce further cuts.

For emerging markets, monetary policy flexibility is closely tied to economic stability. Countries with strong current account balances can lower interest rates with fewer concerns about currency depreciation or capital outflows. However, nations such as Brazil, Romania, and Poland face challenges due to above-target inflation and weaker external conditions, making interest rate cuts more difficult.

Governments looking to respond through fiscal measures such as increased spending or tax cuts face significant limitations. Resources have been strained by recovery efforts following the covid-19 pandemic and the surge in energy prices caused by the Russia-Ukraine war. Countries such as Germany, South Korea, and Australia, with relatively lower debt and manageable deficits, have more room to implement fiscal stimulus. In contrast, nations like France, Italy, Japan, and the UK, which are burdened with high government debt and fiscal deficits, have little flexibility to maneuver.

MARKETS THIS MORNING-

The sell-off on Wall Street extended to Asian markets, with Japan’s Nikkei falling 1.7%, while Topix fell 2%, and South Korea’s Kospi is down 1.5%. China was not spared, with the CSI 3000 falling 0.2% and Hong Kong’s Hang Seng index down 0.9% in early trade.

Wall Street futures indicate a lower open later today, as concerns over a potential recession continue to drag down stocks.

THE CLOSING BELL: TADAWUL-

The TASI fell 0.8% yesterday on turnover of SAR 5.3 bn. The index is down 2.4% YTD.

In the green: Derayah (+30%), RIBL (+4.5%) and Alujain (+3.6%).

In the red: AlBaha (-8.1%), Rasan (-7.8%) and Riyadh Cables (-7.7%).

THE CLOSING BELL: NOMU-

The NomuC fell 1.0% yesterday on turnover of SAR 40.7 mn. The index is down 1.4% YTD.

In the green: NBM (+9.5%), Al Mohafaza for Education (+7.6%) and Horizon Food (+5.6%).

In the red: AlRashid Industrial (-11.1%), Balady (-9.5%) and Sure (-9.5%).

CORPORATE ACTIONS-

The Capital Market Authority approved capital increase requests for four companies, including WSM for Information Technology, Bank Albilad, Raoom Trading, and Qomel Company through capitalization and bonus share issuances, it said in multiple statements.

#1- Bank Albilad secured approval for a 20% capital increase to SAR 15 bn via a bonus share issuance, at the rate of one share for every five existing shares. The increase will be funded using SAR 1.5 bn from retained earnings and SAR 1 bn from statutory reserves. The move — which got board approval last month — aims to bolster the bank’s solvency while retaining resources in operational activities.

#2- Raoom Trading got the green light to double its capital to SAR 125 mn via bonus share issuance at the rate of one to every share, funded by SAR 62.5 mn from retained earnings.

#3- Qomel Company was also cleared to double its capital to SAR 70 mn via bonus share issuance, funded through SAR 32.6 mn from share premium and SAR 2.4 mn from retained earnings.

#4- WSM for Information Technology will increase its capital to SAR 21.5 mn, by transferring SAR 2 mn from retained earnings.

Emaar, the Economic City increased its planned PIF debt conversion to SAR 4.12 bn from SAR 3.97 bn to include interest and fees through December 2024, it said in a filing to Tadawul. The revised terms were formalized in an addendum agreement, with the conversion subject to shareholders’ approval and regulatory clearance. The move is part of Emaar’s capital optimization plan.