This week we focus on the US imposed tariffs on Aluminium and steel, look at the FTSE 100’s performance in May and review three key events affecting financial markets in the week of 28 May.
The US made good its threat to impose aluminium and steel tariffs of 10% and 25% respectively on the EU, in a move which their trade commissioner, Cecilia Malmström, cited as “pure protectionist” and “illegal”. While stating that they did not believe they were in a trade war, the EU has filed a case with the World Trade Organisation and is making tweaks to its list of US products on which it will impose retaliatory duties as early as 20 June. The tariffs were also imposed on Canada, Mexico and Japan.
GfK’s consumer confidence index increased overall by two points in May 2018, although it remains in negative territory at -7. Four of the five measures increased, although the major purchase measure decreased – also by two points. The team at GfK flagged that consumers appear to remain downbeat about the general state of the UK economy – a situation that has continued for 29 months. This is despite the record low unemployment levels, rising household incomes, falling inflation and ongoing low interest rates which should encourage borrowing.
The country’s latest political saga – while nothing extreme for a country that has seen nearly 70 governments since World War II – led to the biggest one day change in Italian bond yields since 2011 on Tuesday 29 May, putting the country’s debt on a precarious path if nothing is done. As the thinking goes, once that happens, Italy will have no choice but to leave the Eurozone, as it simply will not be able to pay the high rates of interest demanded by the market – at least, not in Euros. However, the populist parties are not running on a platform to leave the Eurozone and instead are promising to reject European fiscal deals and increase domestic spending, which in turn may impact the debt burden more profoundly.
The Federal Reserve is looking to tone down the Volcker Rule aimed at defusing the kind of risk-taking on Wall Street that helped trigger the 2008 Financial Crisis. This bans banks from proprietary trading – high risk bets in trading that risk depositors’ cash to provide a profit to the bank. The proposed change would not affect the 18 banks that undertake some 95% of the US bank trading volume, but instead the less stringent requirements would apply to banks that do less trading. The proposal will be opened to public comment for 60 days before a final decision is due.
The FTSE 100 finished up on the month of May over 2% and hit a fresh record high on 21 May of 7,859. The headline UK share index saw a positive month as the value of Sterling fell from US$1.38 to US$1.33 over the course of the month. The inverse relationship between the two exists because the underlying companies see some 75% of their earnings come from overseas and so are worth more when the Pound falls in value. Meanwhile the rising oil price per barrel, which hit US$80 for Brent crude – a four year high – also benefited the index. Oil prices started to increase after President Trump walked away from the nuclear deal with Iran, which in turn helped commodity stocks in the index. This supported 7IM portfolios. Using the Balanced fund as an example, we added 3% of the value of the fund to the FTSE 100 in November and a further 1% in February.
THREE ANNOUNCEMENTS DUE THIS WEEK
05 Jun – UK Markit/CIPS Services PMI (May) // 05 Jun – EU Retail Sales (Apr) // 06 Jun – US Balance of Trade (Apr)
SOURCES: BLOOMBERG, ONS, REUTERS, 7IM
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