Insight Investment weekly review and global economic outlook for the week ahead

Trump’s plans for a 10% tariff on $200bn of Chinese goods increased worries regarding global trade, causing commodities to decline.

Following last week’s payrolls, this was a quiet week for economic data, but trade numbers from China today showed that China’s monthly trade surplus with the US rose to a record.

Trump’s plans for a 10% tariff on $200bn of Chinese goods increased worries regarding global trade, causing commodities to decline.

We introduced a new range-bound option position on South African equities, to benefit from a potentially sideways market environment in the near term. In addition we trimmed our commodity exposure due to concerns regarding global trade.

Next week, the US earnings season will be in focus, as will Fed Chair Powell’s semi-annual report to the Senate Banking Committee and President Trump’s summit with President Putin.

Strategy review

We introduced a new range-bound option position on South African equities, to benefit from a potentially sideways market environment in the near term. In addition we trimmed our commodity exposure due to concerns regarding global trade.

Market and economic review

China slowdown and US expansion causes China trade surplus with US to rise to a record

Trade numbers from China today showed that China’s monthly trade surplus with the US rose to the highest levels since records began in 1999. This increase was driven both by a continuation of a slowdown in China and an expansion in the US. US consumer price index data showed, as expected, the largest annualised gain in more than six years with a 2.9% rise. European data was soft with the ZEW economic expectations index falling to the lowest since 2012. While German exports surged to 1.8% in May, well ahead of 0.7% expectations, this could be due to purchases of cars being brought forward ahead of the threatened tariffs from President Trump.

US plans tariffs on $200bn of Chinese goods

The US planned 10% tariffs on $200bn worth of Chinese goods, in a significant escalation of the ongoing trade war. Trump had earlier stated that he could impose duties on virtually all Chinese imports. China had previously matched earlier 25% tariffs on $34 billion of Chinese imports, and said it was planning countermeasures to the latest tariffs. Given China imports less to the US than it exports, it would have difficulty continuing to match US tariffs but could find other methods of retaliating. China has instead been attempting to align with Europe by pledging to open up its markets with Premier Li saying, “opening up has been a key driver of China’s reform agenda, so we’ll continue to open wider to the world”. French Minister of the Economy Bruno Le Maire has earlier said that if “there is an increase in tariffs …our reaction should be united and strong”.

North Korea officials don’t turn up to meeting and accuse Pompeo of making “robber-like” demands

On Thursday North Korean officials failed to turn up to a meeting with US counterparts to discuss returning the remains of US soldiers killed during the Korean War. On Saturday, after the US Secretary of State Pompeo left Pyongyang, North Korea state media KCNA said the US made “unilateral and robber-like denuclearisation demands [such] as CVID, declaration and verification that go against the spirit of the North- US summit”. On Monday, President Trump suggested China was to blame for the wide gulf between the US and North Korea by tweeting “China, on the other hand, may be exerting negative pressure on a deal because of our posture on Chinese Trade-Hope Not!”.

Commodities decline due to trade war worries and increased supply from Libya

Following the US plans for additional Chinese tariffs, both hard and soft commodities sold off. Oil also suffered from higher-than-expected production from Libya. Given many emerging market economies are dependent on the production of commodities, this weighed on their performance. Separately, Turkish assets slipped and the Turkish lira softened following Erdogan’s appointment of his son-in-law to be in charge of the economy.

European Commission cuts eurozone growth forecast

Draghi said that “we’re confident that basically thanks to our monetary policy, the inflation rate will converge to our objectives”, but also warned that there are risks related “to the threat of increased protectionism”. Citing trade tensions, the European Commission cut its forecasts for the eurozone’s 2018 growth to 2.1% from 2.3%. In the US comments were more positive with the Chicago Federal Reserve (Fed) President Charles Evans stating the “economy seems so strong that it seems natural that businesses and consumers can live with slightly higher borrowing costs”. The New York Fed President John Williams also said “we’re not seeing the kind of build-up in leverage…that was pretty obvious in the mid-2000s”.

UK Cabinet unanimously backs May’s Brexit strategy, but Boris Johnson and David Davis subsequently resign

While last Friday evening Theresa May announced the Cabinet had formally endorsed her Brexit plan, over the following days she suffered several resignations. The UK Foreign Minister Boris Johnson and Brexit Secretary David Davis resigned due to disagreements over Prime Minister Theresa May’s proposals for the UK’s future relationship with the EU, as they favour a ‘hard’ Brexit. The UK white paper, which proposes a ‘softer’ Brexit, aims to commit the UK to the EU single market for goods but not services, a dual tariff regime to allow the EU to set non-EU tariffs, and no hard border for Northern Ireland.

Outlook

UK House of Commons to vote on Customs Union on 16-17 July

Next week the House of Commons will decide if the UK should remain in a Customs Union with the UK. A report on EU immigration to the UK is also expected to be published. The key date for Brexit negotiations is the EU summit on 18-19 October, as the official Brexit day is 29 March 2019, after which there will be a transition period until end 2020. The EU Chief Brexit negotiator has pushed back on May’s plans, indicating the indivisibility of the four freedoms of people, goods, services and capital. However, the Irish prime minister noted the EU may be entering a space where it can show flexibility in Brexit talks.

Next week there could be interesting comments from the Fed, and from the summit between Trump and Putin

On Monday there is a summit between President Trump and President Putin in Helsinki. There is likely to be a contrast between any comments made and President Trump’s comments this week regarding Germany being “a captive of Russia”, and with Nato “that countries not only meet their commitment of 2% of their GDP on defence spending, but that they increase it to 4%”. Separately, the following day on Tuesday Fed Chair Powell is due to give his semi-annual report to the Senate Banking Committee.

US earnings season starts in earnest, but it is a light week for economic data

Today US earnings were mixed, but next week the US earnings season starts in earnest. There are 64 S&P 500 Index companies set to report, including the remaining US banks and several key technology companies such as Microsoft, Netflix and IBM. The main economic data point will be the Q2 GDP print in China, but there is also the US June retail sales report.