Last week Donald Trump surprised markets by signalling that the US will increase tariffs on the remaining $300bn of trade between the US and China that does not already have additional levies applied. The 10% tariff will hit those areas previously avoided, such as end consumer goods, that will naturally have a much greater impact on the average American. These tariffs are due to come in on 1st September, but negotiations will continue in the meantime. Financial markets reacted badly to this revelation, having thought that some progress may have been made towards a compromise. Global equities fell and haven assets such as sovereign bonds and gold were in high demand as investors tried to protect themselves from a possible escalation. Nevertheless, this appears to be a repeat of the approach taken by Donald Trump throughout this process, although with the US presidential election in 2020, he may now be thinking more about the end goal.
Federal Reserve cuts rates
The highly anticipated meeting of the Federal Reserve last Wednesday resulted in a widely expected 0.25% cut to US interest rates. The quarter point reduction disappointed some investors that were expecting a more aggressive 0.5% and the hawkish tone from the meeting implied that additional cuts over the coming month would not be the default, again falling short of expectations. The vote to cut rates was not unanimous with 2 out of 10 dissenting, suggesting that there were also some on the committee not convinced that cuts were necessary given the current strength of the US economy and labour market. Nevertheless, the bond market is still pricing in much looser monetary policy over the coming years and the Federal Reserve will have to work hard to change expectations if they do not want to take that path.
Boris Johnson’s second week as Prime Minister was marked by a fall Sterling as markets attempted to price in an increasing risk of a no-deal Brexit. Many market participants are now mirroring the government’s position that the default outcome will be a no-deal, until proved otherwise. The silver lining to the recent falls in the currency mean that the scope for a positive surprise has increased. If the new government is able to come through a negotiation with the EU with something to show for it, the market is now likely to view it very positively. Nevertheless, a weaker currency has meant that those UK companies that export or have significant overseas operations have seen stronger share price performances as their revenues in Sterling terms become more valuable, lifting the market as a whole.
|% 1w*||% 1m*|
|Europe ex UK||-2.27||-0.30|