Markets & Key Events | 13th May 2019

US tariffs increased to 25% on $200bn worth of Chinese exports

Following a tweet from Donald Trump last weekend, markets were dominated by the threat of US tariffs being increased from 10% to 25% on $200bn worth of Chinese exports on Friday, if trade negotiations failed to progress.  This led to a sharp reversal in sentiment, with most equity markets falling over the week, and a rally in government bonds.  On Friday, it was finally announced that tariffs would be increased, yet counter to expectations, markets rose on Friday morning, following a further a tweet from Trump late on Thursday, having received a “beautiful letter” from Xi Jinping, his Chinese counterpart, urging the two countries to “work together” to resolve their differences on trade.

Equities down over the week

Over the week, up to 12pm London time, the US S&P 500 index shed 2.5%, the Nasdaq fell 3.1%, Eurostoxx 600 fell 3%, the UK’s FTSE All Share fell 1.7%, the Japanese Topix index gave up 4.2% and the Australian S&P/ASX 200 index fell 0.4%.  Emerging markets had a rougher ride, losing 5.0% over the week, with the Chinese Shanghai Composite index falling 4.5% for the week, having rallied 3.1% on Friday.

Government bonds and gold rally

As market volatility picked up, government bonds rallied, with the yield on the 10-year US Treasury, which moves inversely to price, falling to 2.45%, UK Gilts 1.12% and German Bunds back into negative territory, yielding minus 0.04%. Gold picked up a little, rising 0.4%, now trading at $1,286 an ounce.  The Japanese Yen, often considered a safe haven currency, rose by more than 1% versus the US dollar over the week.

Issues under discussion

Trump trade wars unlikely to end with China

Trump’s threatening tweet last weekend caught markets on the hop and has led to a swift reversal in investor sentiment, having rallied for the year to date on a combination of the US Federal Reserve pausing on further interest rate rises, and hopes that the US and China can resolve their differences over trade. However, it was probably unrealistic to ever expect these talks to progress smoothly and when, or if they are resolved, we do not believe it is the end of Trump’s trade wars.   Expectations are high that the automotive sector is next on his list, with Europe in particular, firmly in his sights.

Encouraging economic data releases on the one hand, trade war uncertainty on the other

Aside to this, there are some early signs of recovery in the global economy, with a number of countries releasing GDP growth data exceeding expectations, with the UK joining those ranks today, having grown by 0.5% in the first quarter.  Germany has also unexpectedly reported a rise in exports in March, adding to recent indications that the Eurozone’s largest economy is showing more resilience to global economic challenges than previously forecast.  Exports rose 1.5% from February, and 1.9% higher than the same month a year earlier, versus expectations of a 0.3% decline.  It is too early to suggest the global economy is out of the woods yet, and clearly Trump’s recent intervention is not helpful. But there are encouraging signs that this slowdown is just a pause, in the context of one of the longest economic recoveries in history.

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