Week ending 31st May 2019.

It was an ugly week for global equities as intensifying trade concerns soured sentiment for risk assets.

Tensions escalated after China suggested that it could use its dominance in key rare earth metals as a trade war weapon (the US relies on China for about 80% of its rare earth metals, which are used in a host of applications from smartphones to electric vehicles and defence products).

Then in a Twitter post late last night (Thursday 30 May 2019), Donald Trump combined his big two Presidential election campaign issues (immigration and trade) saying that the US will impose a 5% tariff (rising to 25% by 1 October 2019) on all goods from Mexico “until such time as illegal migrants coming through Mexico, and into our country, STOP”.

While these tariffs would be a drag on global economic growth (the US imported $346.5 billion of goods from Mexico in 2018 – 76.8% of all of Mexico’s exports), there is a good chance that Donald Trump will relax some of these tariffs, especially if confidence and sentiment in US equity markets starts to suffer – as he has on several occasions tied his Presidency to the stock market performance.  Furthermore, these proposals may come up against substantial opposition in Congress.

On a positive note, this trade friction is likely to spur the Fed into cutting US interest rates!

It was a light week for economic data releases.  Of most interest was the second release on US Q1 GDP, which was revised down very slightly to 3.1% from 3.2%, while the Fed’s favoured inflation measure, the core PCE for April came in at 1.6% – below their 2% target, which again suggests that US interest rates have peaked and it is only a matter of time before the Fed starts cutting US interest rates.

In the UK, the pound weakened slightly over the week as the market digested the results of the European elections.  While the Brexit uncertainty will continue, given both the pro-Brexit and pro-European parties did well, the results of the election suggests to us that Tory MPs are more likely to accept a no-deal Brexit than a general election.

This all suggests that the next move in UK interest rates will be down, despite the fact that it was only a month ago that Mark Carney, the BoE Governor, raised growth forecasts and signalled that UK interest rates are likely to rise.

We have another reasonably quiet economic calendar week ahead.   Friday’s (7 June 2019) US employment data (non-farm payrolls; unemployment rate; the participation rate; and average earnings) is the week’s key economic event.  We also have the Eurozone CPI and Q1 GDP along with an ECB monetary policy meeting.

Investment Management Team

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