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, 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.

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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-

The ADX fell 0.6% yesterday on turnover of AED 1.1 bn. The index is down 0.3% YTD.

In the green: Sharjah Cement and Industrial Development (+9.3%), Emirates Telecom Group (+2.5%) and Eshraq Investments (+2.2%).

In the red: Umm Al Qaiwain General Investment (-9.9%), Pure Health Holding (-7.2%) and Space42 (-6.5%).

Over on the DFM, the index fell 1.7% on turnover of AED 686.1 mn. Nasdaq Dubai was down 1.5%, and up 1.3% YTD.

CORPORATE ACTIONS-

Adnoc petrochemicals JV Borouge appointed Al Ramz Capital as its liquidity provider, according to a DFM disclosure (pdf). Following regulatory approvals, Al Ramz will begin trading Borouge’s shares within specified parameters starting today.

Cryptocurrency company Phoenix Group’s CEO Munaf Ali (LinkedIn) has increased his stake in the company, acquiring 20 mn ordinary shares through direct market purchase since November 2024, according to a press release.

Abu Dhabi Islamic Bank (ADIB) will distribute AED 3 bn in dividends to its shareholders for 2024, it said in a disclosure (pdf) to the ADX. This represents 83.43 fils per share and 83.43% of its paid-up capital.

NBQ considers AED 360 mn in dividends: The National Bankof Umm Al Quwain ’s (NBQ) board approved the distribution of AED 360 mn, or 18% of its paid-up capital, in dividends for 2024, according to a disclosure (pdf) to the ADX.