Global stocks down on trade disputes

Market Update

Global equity markets saw a rebound last week, with the exception of Emerging Market equities which were down -1.3% in Sterling terms, as the US-China tariff fight appeared to escalate. European equities saw the strongest gains, up +3.2%, with Japanese and UK equities up +2.4% and +2.3% respectively. US equity returns were relatively subdued, up +1.6%. Government bond yields fell globally, UK 10Y Gilt yields down -10.1 bps to 1.277%, while US 10Y Treasury yields fell -7.6 bps to 2.684%. Sterling fell last week as talks between the Government and Labour failed to deliver a deal, increasing the likelihood of a ‘no-deal’ Brexit, so that the Pound was down -2.1% vs the US Dollar and -1.5% vs the Euro. In US Dollar terms Gold fell -0.7% while Oil rose +1.8%.

CIO Analysis

With trade wars now hitting a major firm, Huawei, the market spotlight is still on Mr. Trump’s mercantilist efforts to reassert US supremacy at the expense of America’s major trade partners. However, market attention could soon be on the European elections due to take place from the 23rd to the 26th of May.  For the first time in history, anti-establishment, and thus mostly anti-Europe parties, may win up to a third of the vote for representation in the 750 seat parliament. If the EU parliament is dominated, or at least populated with enough euro-sceptic politicians, its functioning could be encumbered and important decisions deferred or cancelled.

To mitigate the consequences, Brexit might even be sped up, to eject a portion of the euro-sceptics from an assembly that has devoted itself to closer European integration. The real risk, however, lies in the Euro currency. As more euro-sceptic parties are now closer to decision-making positions, support for a currency that has been kept alive by sheer political will is being eroded. In a climate of euro-scepticism in the parliament and tense Franco-German relations, it is harder for an acceptable compromise to be reached as to Mr. Draghi’s replacement in November, which markets could take as a sign of resurgent Euro currency risks.

David Baker, CIO

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