Weekly Market Overview – Despite US assurances, trade war fears still weigh on markets

With the continued escalation of threats of tariffs between the US and China, markets suffered another week of negative returns. Global equities were down -1.0% in Sterling terms, dragged lower by US equities which returned -1.8%. Emerging Market and Japanese equities also suffered, down -1.1% and -1.0% respectively. European equities were relatively unscathed with a flat return, while UK equities bucked the trend by gaining 1.9%. In a week where each side upped the ante causing sell-offs, before US advisors such as Larry Kudlow made soothing remarks initiating rallies, the US sold off heavily in Friday’s afternoon session. This artificially boosted the relative performance of European/UK indices, although they have opened higher in Monday’s trading. It was also another bad week for IT stocks following the Facebook/Analytica scandal and Donald Trump’s attack on Amazon. Sterling had a strong week, up 0.5% vs USD and 0.9% vs EUR. It was also a negative week for bonds, with UK 10Y Gilt yields up 4.6 bps and US 10Y Treasury yields up 3.5 bps. Meanwhile in USD terms Gold gained 0.7% and Oil fell -4.4%.

Volatility has persisted in the last two weeks and could well continue to do so in the near future, as dangers of less accommodative central banks are compounded by escalating trade threats between the US and China. It is good to be reminded that actual tariffs are yet to be enacted. On the one hand, it allows the US President to play to his internal audience – which is presumably his target – without actually hurting the economy. On the other hand, rapid escalation may lead the two parties to a situation where no one will be able to back down without losing face. How this will play out is fairly uncertain at this point. We are fairly positive that a cessation of hostilities on both sides would be a market-positive event, but we also acknowledge that escalation reduces the probability of a positive outcome. We do not rule out the possibility that central banks, who have been keen to avoid supporting risk assets, will relent and increase accommodation, which should reduce market volatility.

Please read our full Market Update Week 14