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Global Markets to 12 August 2019

 

Highlights

  • Trading is highly erratic on global stock markets as President Trump ratchets up tensions between the US and China.
  • The scramble for US debt as a safe-haven asset class pushes yields even lower, increasing concerns that a recession may be in the offing.
  • In Italy, an autumn election looks increasingly likely as Matteo Salvini pulls the plug on any coalition government.
  • Sterling continues to slide on news that the UK economy has contracted in the second quarter – its first contraction in almost seven years.
  • In the commodity markets, Brent crude oil prices bounce back, while gold trades just below the psychological US$1500 threshold.
  • Government bond yields fall, and the world prepares for an increasingly hostile US-China trade war, creating a difficult environment for risk assets (such as equities).

Global Market Summary

It was a week of erratic trading on global stock markets, catalysed by upheavals in US and Italian politics. Following his recent threat to impose a further 10% trade tariff on the remaining US$300 billion of untaxed Chinese exports, President Trump told reporters on Friday that he did not think that the US was ready to strike a trade deal with China.

Should this new tariff be imposed from September, then virtually all Chinese exports to the US would be subject to levies ranging from 10% to 25%. However, China retaliated by letting the value of its currency fall to its lowest level in more than a decade and halting all crop imports.

It is becoming increasingly apparent that this trade war is hurting both economies and that neither will emerge from this conflict unscathed. Unfortunately, these tit-for-tat tariffs have affected the wider global economy over the last 18 months: trade wars have broken out in Japan, Europe and other parts of the world.

Both the US and China are facing other problems: China has been trying to reduce its current reliance on cheap manufacturing and instead produce higher-value-added goods for domestic consumption. And recent events in Hong Kong have shown just how precarious China’s political stability has been of late.

Furthermore, China’s economic growth has plummeted from double-digit to 6.2%, and currently stands at a 27-year low. Even more worryingly, US companies are now looking beyond China to expand their resources, production and distribution activities.

China’s economy, however, is still one of the fastest-expanding in the world. This recent slow-down cannot therefore be characterised as a crisis. Instead, China can be said to be suffering the same growing pains that any country that had joined the world’s exclusive developed countries would be suffering.

As far as the US is concerned, the country has a charismatic commander-in-chief who made it very clear on the first day of his presidency that he would shake up the system. The problem, however, is that Americans are now feeling the pressure of trade tariffs – particularly farmers, who have so far supported Trump. To counter any waning support from the agricultural sector, the Trump administration has directed billions of dollars’ worth of subsidies to help those farmers whose livelihoods have been impacted. Needless to say, this financial support comes at a cost and more sensitive, fiscally conservative Trump supporters are beginning to question that cost and the outcome of this trade war.

Like China, America’s overall economy remains strong and unemployment is at a 50-year low. But its growth rate is slowing and as the President enters the final year of his first term of office, the Trump administration will need to navigate an economic and political course that will sit well with US voters before they go to the polls in November 2020.

Although the Chinese government can afford to wait for a new president, even if a Democrat were to win the 2020 presidential elections, it is unlikely that much would change in relation to trade tariffs. A new administration might, however, be more favourably disposed towards China and more sensitive to trade overall.

Talk of abandoning the proposed September trade negotiations sent jitters through the markets last week, creating a nervous backdrop for risk assets (such as global equities). At the same time, many investors rushed to shift their weightings towards the safety of government bonds and gold.

This is creating concern among bond watchers – particularly as the US Treasury yield curve on the 2- and 10-year bonds is dangerously close to inverting – a phenomenon that has preceded every recession for the past 40 years. Although this does not necessarily mean that a recession is imminent, it is associated with elevated recession risks.

In Italy, the prospects of an autumn election now look increasingly high since Matteo Salvini pulled the plug on any ruling coalition government. Mr. Salvini is obviously trying to provoke a crisis and force an election, which would see him installed as Prime Minister. On Friday, Mr. Salvini took further steps to try and bring down the Italian government, calling for a vote of no-confidence in Prime Minister Giuseppe Conte.

By the end the week, there was turmoil on both Italy’s equity and bond markets, with the FTSE MIB Index registering a 2.5% fall and the wider Stoxx Europe 600 benchmark experiencing some volatility.

In the UK, sterling endured another difficult week, dropping to its lowest level since the flash crash immediately after the EU referendum. Currently extremely weak in relation to the euro and the dollar, the view is that should the UK leave the EU without a deal, the pound will likely remain weak for several years until both the UK and EU adjust.

Further weakness is being priced in amid political uncertainty as we approach the 31 October Brexit deadline. And last week’s news that the UK economy had shrunk for the first time since 2012 added yet more pressure to the pound, leading to the Bank of England cutting its future UK growth forecasts.

This is a challenging time for the global economy: growth is slowing in many countries. In the UK, the outcome of Brexit and political uncertainty are negatively impacting the economy, particularly as a general election starts to look increasingly likely. But there are pockets of good news – employment is at record highs in some countries and wages are growing.

In the commodity markets, the price of Brent crude oil has been affected by a combination of recent factors: Middle Eastern tensions between Iran, the UK and the US, the escalation of the trade war and concerns about a slowing global economy.

As far as the recent strength of gold prices are concerned, this can be attributed to three factors: US-China trade tensions, global central bank easing and technical price support. All three are likely to add further stimulus, encouraging people to purchase the yellow metal.

It was a challenging week for risk assets (such as equities), as support grew for government bonds as a safe-haven asset class. A period of increased trade tensions between the US and China now seems inevitable. And the US designating China as a currency manipulator has not helped matters.

However, with additional interest rate cuts likely and dovish central bank policy around the world, investing in good-quality stocks remains a sensible strategy. “Buying on the dips” therefore makes sense – as long as you are thinking long-term and your portfolio is meeting your personal objectives.


Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.

This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.

If you would like to hear more about our wealth management services then please do not hesitate to call us on 0207 337 1390 or contact us via email. We would love to hear from you.

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