Global stocks continue their decline as trade tensions escalate

Market Update

Last week was  torrid for stock markets as the US-China trade war continued to dominate markets. Over the weekend, China released a report on the state of US trade talks criticising the US for “exorbitant demands” and for “resorting to intimidation and coercion”. The result, again, was US equities led global equities lower, down -1.6% in Sterling terms. Both UK and European equities were down -1.5%, while Emerging Market equities were up +1.9%, in Sterling terms. Sterling fell to its lowest level since January to $1.26. The weakness in the pound comes amid continued uncertainty surrounding Britain’s departure from the EU amid the Brexit party’s sweeping victory in the European Parliament elections this week. The win has sparked panic through the ruling Conservative party and has ramped up pressure for Britain to leave the EU without a deal. The yield on the US 10Y Treasury fell to a 20-month low to 2.2% and the UK 10Y gilt yield fell to 0.9% as global bond prices rallied broadly on renewed concerns about global growth. In US Dollar terms Gold rallied +2.3% and Oil fell -7.8%.

CIO Analysis

US Stocks traded below the all-important 200 day moving average for the first time since March. Trade wars continue to grab the spotlight, often distracting from larger issues such as the slowdown in the US economy and earnings, the failure of Europe to rebound and the entrenchment of Eurosceptics in the European parliament. While trade wars can escalate into something very important with serious long term repercussions, at this point they are merely a 200 point catalyst for the S&P 500. But there are larger issues on the mind of long term investors. Last year, it was Donald Trump’s pro-cyclical stimulus which extended the economic cycle. As its effects peter out and with no hope of significant fiscal stimulus in the US and Europe, markets now turn to the US central bank for a long term catalyst:  the first rate cut in over a decade (the last one was two months after Lehman’s collapse). The market is pricing in two rate cuts by September. However, Mr. Powell and his team have indicated that they are willing to be patient with interest rates, but not a single member of the 17-strong Federal Open Markets Committee  is suggesting a rate cut until at least 2022. Trade wars are a potential future catalyst. However a disappointment from the Fed, the driving force of this 10 year plus cycle is what investors should really be looking at going forward.

David Baker, CIO

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