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Global Markets to 20 May 2019


Highlights

  • Tit-for-tat reactions to trade tariffs from the US and China rattle global stock markets.
  • Geopolitical tensions between the US and Iran push the price of crude oil up to US$73 a barrel.
  • As global equity markets start to feel geopolitical tensions, the 10-year Treasury yield retreats on safe-haven buying.
  • In the UK, Theresa May announces her intention to set out a timetable for her departure, while Boris Johnson remains the front-runner to become the next PM.
  • Sterling suffers its worst week in a year as Brexit fears mount and the prospect of a leadership battle gathers momentum.
  • Global equity markets are likely to remain volatile over the coming weeks as tariff tensions, Brexit and the EU elections all combine to undermine global investor confidence.
  • CEO Petronella West gears up to run in Sierra Leone next weekend.

Global Market Summary

Global equity markets enjoyed something of a rollercoaster ride last week on the back of tit-for-tat reactions to the imposition of trade tariffs by the US and China. While both countries’ decisions initially unnerved the markets, a relief rally soon followed: there are growing expectations that the US and China will strike some kind of a deal at next month’s Group of 20 summit in Osaka, Japan.

This will give both sides time to try and find a solution to the problem and prevent further escalation. Meanwhile, the tariffs announced in the last few days will not actually take effect until the end of the month. It is therefore likely that the markets will stabilise and become less unpredictable, given that they have recently been looking oversold.

The Trump administration appears to have avoided an immediate collision with the European Union and Japan by deferring a decision to impose tariffs on the auto sector by up to six months. This will prevent any further escalation – escalation that would almost certainly have elicited a reaction from the other two parties.

Another financial asset about which the markets would be concerned were the trade war to intensify is the US$16 trillion Treasury bond market. As the world’s two biggest economies lock horns over tariffs, there is growing anxiety that China might consider using its US$1.1 trillion holding in US Treasuries as a trade war weapon against Trump and as a means of subduing his tariff tantrums.

However, although China is the largest foreign holder of Treasury debt outside of the US Federal Reserve Bank, it is unlikely to dump or increase its current selling programme. Doing so would most likely unleash a bout of financial instability that would reverberate around the world. And while the effects might be short-lived, they could well end up damaging China more than the United States.

Furthermore, China’s holding in Treasuries is liquid and pays a positive yield which is more attractive than its two main rival bond markets – Japan and Germany. These two large bond markets can only offer its investors negative yields through their respective 10-year benchmark bonds. Admittedly, China’s central bank has recently been buying more gold; but the benefits of Treasuries and their stability certainly outweigh anything that the yellow metal can offer.

Another factor that affected market sentiment last week was the heightened tension between the US and Iran. The drama began with a period of verbal hostility between the two nations in the wake of attacks on Saudi oil infrastructure. President Trump has, however, indicated that he hopes the two countries do not go to war, a sentiment echoed by Iran’s leadership.

Unfortunately, tensions between Washington and Tehran – coupled with warnings from the International Energy Agency about a squeeze on oil supplies – sent the price of Brent crude heading towards US$73 per barrel. Needless to say, if the price of oil were to increase further and remain at high levels, there would be ramifications for those countries that import oil and possible implications for inflation.

In UK, Prime Minister Theresa May revealed a timetable for her departure, leading to Boris Johnson’s announcement that he does indeed intend to stand for the leadership of the party. Although Mr Johnson is currently the bookies’ favourite to become the next PM, many Tory MPs question his ability to take on the role given his uninspiring two-year turn as Foreign Secretary (not to mention his part in the Brexit chaos in which the party and country are currently gripped).

Unsurprisingly, sterling has been impacted by the ongoing Brexit circus, the timetable of the Prime Minister’s departure and Labour leader Jeremy Corbyn’s declaration that discussions had “gone as far as they can” between the two parties. The political risks to which the UK may find itself exposed in the coming months have created a further bout of weakness for the pound in relation to other leading global currencies.

To conclude, the global equity markets are likely to remain relatively volatile over the coming weeks while the US and Chinese authorities continue with their sabre-rattling over tariffs. In the US, President Trump views the health of Wall Street and containment of the US Federal Reserve Bank as criteria against which the success of his presidency will be assessed.

He is therefore unlikely to do anything that will create a lengthy period of uncertainty, panic or economic disorder for the US or wider global community. In fact, the outlook for global equities is quite promising in the medium term. Central banks around the world appear to be cutting interest rates again, resulting in plenty of liquidity. Indeed, even the Federal Reserve Bank may cut its rates over the coming months.

Equally, however, if a trade deal were signed fairly soon by Washington and Beijing, the world economy could well reflate in the second half of 2019 or in the early part of next year, creating a healthy backdrop for risk assets.

As a final note, we are extremely grateful to everybody who has donated thus far to Street Child on behalf of our CEO, Petronella West, and helped to raise nearly £12,000. The annual Street Child Sierra Leone Marathon is being held next weekend and there is still time to show your support for this wonderful charity. We would like to wish Petronella (and indeed everybody competing) the very best of luck.


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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