Weekly Market Update: Italian populist government calms markets, US populist tariffs re-ignite concerns

Read our full Market Update Week 22

Market Update

Markets sold off and yields rose in the first half of the week on fears about repercussions of the Italian President rejecting the populist coalition’s choice of finance minister and attempting to install a technocrat government. There were concerns that a new set of elections would be needed which could have become a referendum on Italy’s membership of the Euro or even the EU. These moves were largely reversed in the second half of the week as an accommodation was made that appears to allow Five Star Movement and the League party to form a government, although these Eurosceptic parties could potentially challenge EU unity on several issues such as immigration and austerity. Meanwhile President Trump enacted steel tariffs on Canada, Mexico and the EU which also briefly affected markets on Thursday, although the announcement was not unexpected. All in all global equities were flat in local terms, but down -0.2% in Sterling. In GBP terms US equities were the strongest, up +0.3%, while European and Japanese markets were the most affected by events, down -1.4% and -1.6% respectively. UK equities were down -0.3%. US 10Y Treasury yields fell from 2.93% to 2.90% on the tumult. Sterling gained +0.3% vs USD and +0.2% vs EUR. Gold and Oil fell -0.6% and -3.1% respectively in USD.

CIO Analysis

While this commentary is usually devoted to macro and market analysis, this time I’d like to focus on communication. Twice last week I was asked for commentary. Once on Italy, as the Government Bond CDS broke 270bps, and once on President Trump’s trade sanctions targeting America’s allies. On both occasions I turned down the request. Politics is volatile. Most of what markets are presently focused on, like European governments and trade wars, are all speculative events. True, Italian discontent with Europe could eventually change the structure of the monetary union. However, like Greece, they could also capitulate at the prospect of a sudden drop in their living standards. Yes, trade wars could derail global growth. But “War” is a big word which I suspect people wield around all too easily to describe mere skirmishes. We find it best to focus on fundamentals. Companies still earn good returns and markets tend to reward earnings quality. Turmoil just means more return dispersion, as not all companies are rewarded the same during a risk-off period. This environment is good for active managers, and if anything, I would expect the best of them to outperform indices.

David Baker, CIO