This week, we flag the effects of Trump's tariffs on steel and aluminium, highlight three pieces of news for the UK, Eurozone and US and provide an update on what we've changed in portfolios.
Effective next week, President Trump has imposed import tariffs of 25% on steel and 10% on aluminium coming into the US through a clause in a 1962 trade treaty that allows this if the supply of these materials does not support national security. In retaliation, the EU has hit back with a list of products on which it will also impost a 25% duty and is starting an appeal to the World Trade Organisation. Trump has not imposed the same tariffs on Canada and Mexico during the renegotiation of the North American Free Trade Agreement.
Chancellor Philip Hammond is rejecting calls to call the end of austerity in his spring statement on 13 March. He is expected to unveil the smallest budget deficit since 2002 due to the better than expected public finances, and note that the level of national debt is now falling, after growing for 17 years. The UK is now running a surplus of £3.8bn in its current budget – the money borrowed to fund day-to-day spending rather than long-term investment – according to the Office for National Statistics, but still has a total budget deficit of £1.8 trillion or 86.5% of GDP.
The European Union's economy grew by 2.4% year-on-year in 2017, according to Eurostat. The data also showed that the seasonally-adjusted GDP for Q4 2017 rose by 0.6%, while final household consumption expenditure rose by 0.2% in the same period. However, the World Bank criticised the EU on the deepening economic divides between its states. The EU itself has highlighted concerns over the Italian economy due to its “high government debt and protracted weak productivity dynamics [that] imply risks with cross-border relevance”. Germany meanwhile was reminded that its “persistently high current account surplus has cross-border relevance and reflects a subdued level of investment”.
The US enjoyed its biggest hiring spree since mid-2016, in February as 313,000 jobs were added to the workforce. But inflationary pressures remained muted amid signs that the pay gains that recently spooked markets haven’t taken hold. The payroll numbers compare to the 205,000 median estimate in a survey of economists, and the two previous month releases were revised higher by 54,000. The jobless rate held at 4.1%, the fifth straight month at that level. Average hourly earnings increased by 2.6% from a year earlier, a downward revision of the 2.8% gain previously published.
In the event of a sharp fall in global equity markets, foreign currencies such as the US Dollar and Yen tend to act as safe havens. We believe we are moving back towards a world with more volatility in both equity and bond markets, so we believe that increasing the potential for diversification and protection is sensible. As such we have reduced the levels of Sterling-denominated assets in our portfolios and have also bought an option against the US Dollar to complement the Sterling-Euro option purchased last week. As both the timing and the potential catalyst of any sharp movements in the value of Sterling are unclear, we continue to believe the use of options is the best way to mitigate the risks for our portfolios – paying a small premium, which we will lose if Sterling falls or remains stable, but would grow rapidly if Sterling rallies.
THREE ANNOUNCEMENTS DUE THIS WEEK
13 Mar – UK Spring Statement // 14 Mar – US Retail Sales (Feb) // 16 Mar – Eurozone Inflation Rate (Feb)
SOURCES: EUROSTAT, ONS REUTERS, 7IM
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