Global economic commentary from Insight Investment for the week (starting 9 April 2018)

From

Summary

  • Portfolio performance was driven by positive returns in equity and total return strategies.
  • This week has been dominated by trade war news. This initially caused risk assets to sell off, however subsequent calming statements led to a reversal and an improvement in sentiment.
  • As volatility fell from its highs, we held back from adding further positions in total return strategies. As we have reallocated a significant amount of risk previously held in equity exposure to asymmetric option positions, we are comfortable with the shape of the portfolio. We will however remain alert to take advantage of future opportunities as they manifest themselves.
  • Economic data this week was broadly in line with expectations. Next week US earnings season starts with US banks reporting Q1 figures.

Strategy Review

Portfolio performance was driven by positive returns in equity and total return strategies.

Market and Economic Review

Trade war fears escalate as US and China propose 25% tariffs on each other’s imports

Trade tensions between the US and China escalated with daily announcements proposing increased tariffs on each other. On Monday China retaliated against Donald Trump’s taxes on steel with tariffs on 128 American goods. This was followed the next day by the US trade representative office (USTR) proposing 25% tariffs on over US$50bn of imports covering more than 1,300 industrial, technology, transport and medical products. China responded and unexpectedly swiftly and forcefully matched the 25% tariffs on US$50bn of US imports, including soybeans for the first time. The following day Trump ordered his administration to consider tariffs on an additional US$100bn in Chinese goods. This was followed by threats from Beijing that they will “follow suit to the end and at any cost”.

China cannot add tariffs to a further US$100bn in US imports, as the US doesn’t export that much to China. However, it can use similar tactics used last year against South Korea by making life difficult for big US companies operating in its territory and reducing the cUS$20bn in spending of Chinese citizens in the US. Interestingly the EU and Japan asked to join the US in World Trade Organisation consultations on intellectual property issues.

Markets initially panicked on trade war concerns, but subsequently recovered

Equities sunk on Monday as trade war fears escalated, but recovered later in the week as officials damped down fears. Larry Kudlow, Trump’s chief economic advisor, said the US was in a “negotiation” with China rather than a trade war. The fact that there is a 60 day consultation period gave markets confidence there was time for a compromise agreement to be struck. As of early afternoon UK time on Friday all major equity markets are in positive territory for the week. In rates, US treasuries found a bid as the rhetoric escalated, touching as low as 2.73% before pushing back north of 2.8% as investor concerns eased. Safe haven currencies such as the Japanese yen and Swiss franc softened over the week. While implied volatility for equities is relatively high, the VIX index closed below 19 for the first time in two weeks. For other asset classes, levels of implied volatility are relatively low considering the current heated trade war news.

US economic data reiterates theme of strong but moderating growth

In the US economic figures were mixed, but generally supported the recent theme of strong but moderating growth. The ISM non-manufacturing index declined to 58.8 in March, down from 59.5 in February and a shade below consensus expectations. March total vehicle sales were above market expectations while non-farm payrolls were below expectations.

European data was mixed over the week

European economic data was similarly mixed. The unemployment rate in February fell to 8.5%, down from 8.6% in the prior month, representing the lowest reading recorded since December 2008. Euro area CPI rose in March for the first time in four months, reaching 1.4% versus the year prior, but still well below the target inflation of 2%. The Euro area composite PMI continued to decline from the highs reached a few months ago, but is still in expansion territory. Following two snowstorms dubbed “beasts from the east”, UK retail sales dropped 10.1% in March, the worst decline since 2008.

Outlook

US earnings season starts next week while Facebook’s Zuckerberg is due to testify to Senate

On Wednesday Zuckerberg is to speak in front of a Senate panel regarding the scandal around the protection of users’ privacy. While the technology sector has been weak recently, it still remains the top performing sector of the S&P 500 Index on a year-to-date basis. On Friday US banks are due to report Q1 earnings.

US CPI data the key highlight for next week, followed by FOMC minutes

While next week could see more announcements regarding the potential escalation or de-escalation of the China-US trade war, the key scheduled data report is the US CPI on Wednesday. Next week the key European figures will be industrial production numbers for the euro area and the UK. There will also be the final estimates of March inflation for various euro area countries.

Busy week for central bank speakers

After the CPI report we will get the Federal Open Market Committee minutes from the March meeting, the first under new Federal Reserve (Fed) Chair Powell. There are several Fed, European Central Bank (ECB) and Bank of Japan officials speaking over the next few days, which could give indications as to future interest rate rises and whether an ongoing trade war could change the expected path of future increases. Benoit Coeure, an executive board member at the ECB, said the current exchange of words and policy divisions are already having a negative impact on the global economy, and “If this would move into a full-fledged trade war, this has a potential to have quite damaging consequences for growth and jobs, globally, including in the US”.

Xi Jingping to speak at Boao Forum

The Boao Forum for Asia is scheduled from Sunday to Wednesday and Xi Jingping is a keynote speaker. There could be further details of how China plans to respond to the latest tariff threats from Trump. There will also be Chinese trade data, CPI and PPI prints for March released over the week.

New round of Italian negotiations

Italian President Mattarella will hold a new round of negotiations next week. While the Northern League and Five Star Movement have narrowed policy differences, they remain far apart in personal issues. Five Star leader Luigi Di Maio is insisting he becomes prime minister and refuses to allow Forza Italia to be part of the coalition. Northern League leader Matteo Salvini has ruled out breaking the centre-right alliance with Forza Italia to join Five Star.

By Colin Bennett, portfolio manager in the Multi Asset Strategy Group 

You must be logged in to post or view comments.