Notes from the Trading Desk

It was a tough week for global equities as trade wars dominated headlines. Stock markets in the United States, Europe and China and Japan all closed the week lower.

The Digest

Trump’s Testing Trade Talks

US-Chinese trade tensions proved to be the major market driver last week.

The week began badly for equities after US President Donald Trump signalled his intention to raise the tariffs rate on US$200 billion of Chinese imports to 25% from 10%.

This hike went ahead on Friday and over the weekend reports confirmed that Trump has also begun the process of imposing tariffs on a further US$300 billion of Chinese imports. On Monday this week, China retaliated, announcing that it would hike tariffs to 25% on US$60 billion of US goods, effective on  June 1.  This marks a ramp up in tensions, especially after Trump warned China against retaliation.

With this backdrop, investor sentiment was broadly risk-off last week. Cyclical equity sectors generally underperformed, while defensive sectors fared better.

In Europe, real estate was the best performing sector—and the only one to end the week in positive territory. Losses among stocks in the utilities sector were also more muted than other sectors. On the other hand, automobile stocks suffered the most, followed closely by banks, chemicals and basic resources stocks.

In early trading this week, markets sold off further.

The tensions have affected European and US markets, but emerging markets have borne much of the brunt. Emerging market currencies fell to their lowest levels since January in early trading on Monday this week. The Chinese offshore renminbi saw its worst one-day decline since August and made a new year-to-date low on Monday morning. Many commentators feel the spat has the potential to weigh more heavily on China than on the United States.

However, talks between the two sides have not entirely broken down and China has invited US trade representative Robert Lighthizer and Treasury Secretary Steven Mnuchin to Beijing to continue talks. Commentary from Trump’s top economic advisor Larry Kudlow that Chinese President Xi Jinping and Trump may meet at the G-20 summit in June does give some hope of a resolution. But this is all speculative and there’s plenty of time for both sides to change their stance.

This theme is likely to drive markets throughout the coming week.

Brexit: Back in the Spotlight

While there was no real progress last week, Brexit really is back front and centre of political considerations in the United Kingdom.

The United Kingdom’s de facto deputy prime minister David Lidington confirmed last week that the country would be taking part in the European parliamentary elections. He added the UK government was now aiming to reach an agreement on the country’s future relationship with the European Union before parliament breaks for its summer recess in July.

Amid the lack of progress and increasing uncertainty about the political future of UK Prime Minister Theresa May, the pound weakened versus the US dollar.

This helped to mute some of the losses in the exporter-heavy FTSE 100 Index which fared better than its counterparts on the continent.

Now that the UK government has confirmed participation in European parliamentary elections at the end of the month, polling around these elections is now giving us a clearer indication of public sentiment around Brexit. Theresa May’s position looks increasingly precarious.

Several opinion polls paint a very unflattering picture of public sentiment towards May’s Conservative Party and growing support for the new Brexit Party.

May is consequently under increasing pressure from Conservative members of parliament (MPs) to give a timeline for her departure.

Meanwhile, cross-party talks continue to find a Brexit solution that could be acceptable to most MPs. We can expect a wealth of headlines throughout the week and will be keeping an eye on future opinion polls.

Last Week

Europe

European equities traded broadly lower last week, weighed down by concerns over global trade. A lack of progress around Brexit was not helpful in a week where risk-off sentiment took hold.

Away from trade and Brexit, Italy’s fiscal positioning came back into focus last week. The European Commission (EC) cut its estimate for Italian gross domestic product (GDP) growth in 2019 to 0.1% from 0.2% and also cut the 2020 estimate to 0.7% from 0.8%.

This means the estimated 2019 budget deficit would sit at 2.5% of GDP for 2019 and 3.5% of GDP in 2020. However, the EC and Italian government had previously agreed to a deficit target of 2.04% so these new figures could put the two sides on a collision course.

The Italian government criticised the EC report and insisted that it still needed to implement its promised tax cuts. Italian bond yields rose sharply on Tuesday into Wednesday.

In central bank news, with focus globally on dovish central bank releases, Sweden’s Riksbank surprised some commentators when its Deputy Governor Martin Floden suggested there was some possibility of an earlier-than-expected rate hike. Meanwhile, Norges Bank kept rates unchanged at 1%.

In macroeconomic data, German industrial production unexpectedly rose in March, while the country’s imports and exports also rebounded after falling in February.

Asia

Japan reopened after the six-day bank holiday for Golden Week, but closed the week down. The search for safe havens saw the Japanese yen strengthen versus the US dollar, which in turn weighed on Japanese exporters.

Korean equities declined as US-China trade issues weighed and tensions with North Korea escalated thanks to a fresh North Korean missile launch.

In Australia, equities were also weaker, but significantly outperformed the rest of the region. Mining stocks held up well in Australia last week, underpinning equity markets.

The Reserve Bank of Australia (RBA) voted to keep rates on hold at 1.5% which was a surprise, market expectations were for a cut to 1.25%.

Week Ahead

Economic Data

• In Europe we expect UK employment data on Tuesday; German and Eurozone GDP reports as well as eurozone employment on Wednesday; eurozone trade balance on Thursday; and eurozone car registrations and consumer price index (CPI) data on Friday.
• In the US, we expect: Import prices and small business optimism on Tuesday; retail sales and manufacturing survey on Wednesday; and housing starts on Thursday.
• In Asia & Pacific, we expect: Chinese industrial production, fixed-asset investment and retail sales on Wednesday.

 Politics

• On Monday, the US is expected to release details of further 25% tariffs on $300 billion of Chinese imports if no progress in negotiations.
• Brexit negotiations continue through the week.

 Monetary Policy

• US Federal Reserve (US Fed) speakers this week include Eric Rosengren, Richard Clarida, John Williams, Esther George and Thomas Barkin all speaking.
• The Bank of England’s Jonathan Haskel and Alex Brazier speak on Thursday and Friday respectively.

Insight from Our Investment Professionals

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