Investors have been familiar with the ever-unpredictable US-China trade relations impacting portfolio performance since these discussions began in the first quarter of 2018. Most recently, Trump and Xi Jinping had face to face talks to attempt to the break the impasse between the world’s largest economies. Presently, they have agreed to restart a dialogue without lifting any of the existing tariffs. This has brought some positivity and hope that common sense will prevail and that a conciliatory agreement can be made.
In the UK, we saw the Tory leadership race whittle down to two candidates, namely Boris Johnson and Jeremy Hunt. Both individuals have suggested that they would be willing to take the UK out of the European Union without a deal, albeit they have stated that this would be a last resort.
The US-China trade turbulence continued in June with some eventual respite for investors with hints that an agreement could be made. World leaders met in Osaka, Japan for the G20 summit to discuss the most important financial and economic issues of the day such as trade agreements, climate change and the crisis in Iran. However, the overriding theme was the strained trade relationship between China and the US, due to the material impact it will have on global growth and therefore the economic future of all twenty nations in the G20. In a private meeting they agreed to restart trade talks and Trump also stated that he would allow US companies to continue to sell to the Chinese tech giant Huawei, in a move seen as a significant concession. Huawei has been a large obstacle within the trade discussions. In May, the US banned Huawei from buying US goods without a licence - including from Google, which is crucial to many of its products. The ban could cost the firm $30bn (£24bn) in revenue this year. As a result, this temporary lifting of the ban will help to appease the Chinese premiership.
Trump has stated that the current tariffs of $250bn applied exclusively to Chinese goods will remain and the same approach has been taken by China regarding the $110bn tariffs to American goods. However, there will be no more tariffs enforced, for the time being. The US President did not impose a deadline for the talks to be completed, and without a specific timeline this could mean that talks could be protracted, with Trump even stating that he “is in no hurry”. However, the US election is now less than eighteen months away and the US president is determined to be re-elected based on a strong economy and a buoyant stock market. A cordial outcome with China is likely to be an easy win for the US President and will strengthen his hopes for re-election.
There are suggestions that the trade war has already impacted global growth and the US central bank took this into consideration when outlining their future interest rate policy. The central bank is reconvening on 30th July and investors expect the central bank to cut interest rates for the first time since the financial crisis. The market has priced this in, which has supported US equities as corporates legislate for lower borrowing costs in their future outlooks. The central bank has stated that it has not been influenced by Donald Trump’s explicit and vitriolic criticism of the Federal Reserve’s decision to continue hiking rates. Trump has recently stated that the bank’s previous monetary policy was “insane” and is slowing growth in the US. We will continue to monitor the Federal Reserve’s outlook as this can have a domino effect on other central banks’ monetary policy.
The Tory leadership campaign is in full swing with Boris Johnson and Jeremy Hunt going up and down the country attempting to persuade the Conservative membership to back them. The Conservative Party's 160,000 members will begin voting in early July and Theresa May's successor is expected to be announced on 23rd July. Both candidates have stated that they would be willing to keep no deal on the table and would like to renegotiate the withdrawal agreement. However, the European Union (EU) are adamant that they will not materially change the deal agreed, albeit they still want to avoid a no deal. At present, it looks as if Boris Johnson will be elected as Tory leader and therefore take control of the Brexit negotiations.
The House of Commons is likely to be in session, after the summer recess, for about twenty-five days under our new Prime Minister. This does not give the Government much time to pass legislation for a potential new deal with the EU and the default position is for the UK to leave the European Union without a deal. As we have seen, Parliament has already voted against a ‘no deal’ Brexit and this stance is unlikely to change as we move closer to 31st October. If Parliament cannot come to an agreement, then it is probable that a general election will take place to attempt to elect a Leave or Remain coalition to break the Brexit impasse.
The Eurozone economy is struggling with pressures from Brexit uncertainty and the slowdown in global growth. The European Commission has cut its growth forecast as pressures from a potential US-EU trade war, the trade conflict between the US and China, and political uncertainty across the region are all pointing towards the balance of risks leaning towards the downside. These factors are causing concern for European leaders and the European Central Bank.
As a result, we saw Mario Draghi reiterate that the central bank had “considerable headroom” to seek to stimulate the economy further in the face of threats including tensions over global trade. This suggests that the European Central Bank are willing to reintroduce the monetary policy measures it ceased in 2018 to attempt to bolster the eurozone and dampen the effects of the US-China trade war. Of course, if a deal can be made between the US-China then this will alleviate fears over future growth.
China’s slowest GDP growth in nearly three decades highlights how the trade war has dampened the economy. Weaker economic growth has prompted the Chinese government to initiate a series of stimulus measures, as well as discussions around potential tax cuts. The breakdown in the US-China trade talks has reawakened the concerns we experienced in the final quarter of 2018 and this will continue until a deal is struck. We still believe that the most viable solution for growth in this area is for China to make an agreement with the US to remove the restrictive trade barriers.
Surprisingly, we saw Donald Trump enter North Korea in a historic meeting. The US President and Chairman Kim posed for handshakes before agreeing to resume stalled nuclear talks. This may seem like a side commentary to market events but a peaceful solution to the military threat posed by North Korea will help to ease global concerns for peace.
Macro events such as the breakdown in US-China talks, Brexit and the slowdown in Chinese growth are all influencing the direction of markets. The US-China talks continue to be protracted but we arehopeful that both world leaders will come to an amicable agreement to provide more certainty within the world economy. Despite the Federal Reserve dampening their outlook on domestic growth, the US is powering ahead when compared with other developed economies and we are still seeing business confidence improve which is supporting investment. The UK market will remain uncertain until the Brexit ambiguity has been resolved. The outlook for Europe is negative at present with Brexit uncertainty and US-China trade tensions being clear factors affecting this, which we believe will continue in the short term. We continue to favour fund managers that have a flexible, active approach, with a global remit, so they can asset allocate across the entire investment world (as we believe diversification is key). However, most importantly we will endeavour, on your behalf, to identify fund managers that invest in underleveraged companies with strong balance sheets as we believe that highly indebted companies will be punished in 2019, if there are any unexpected events.
Please note: The opinions expressed in this update are those of A&J Wealth Management Limited only, as at 2nd July 2019, and are subject to change. The update is for information purposes only. Source: Financial Times.