Key Info Hero

Trade War Escalates

17 Jul 2018

Jack Turner, Research Analyst

This week talks of the latest news from the US regarding trade tariffs, as well as flagging three other key items of news. We also flag some more of the portfolio actions undertaken last week by the 7IM team.

Trade War Escalates

China has filed a complaint to the World Trade Organisation after President Donald Trump announced plans to levy further tariffs on US$200bn worth of Chinese goods exported to the US – a figure that represents 40% of Chinese exports to the US. The latest list has yet to see the tariffs imposed, but US officials are already confident that they will ‘win’ given that China imports around US$130bn from the US, compared with the US$505bn in Chinese goods imported by the US. However, China has other options e.g. their purchase of US Treasuries which funds the US’s budget deficits. The US is also entangled in trade disputes with the EU, Canada and Mexico.


NEWS

UK
The visit by Donald Trump dominated news as the President suggested that Theresa May’s approach to the EU negotiations was flawed, that Boris Johnson would be a preferred prime minister and that the compromise that was causing so much strife in the Conservative Party would also “kill” a US-UK trade deal. The following day, however, the rhetoric changed and, instead, Trump stepped back from his comments, claiming that they were “fake news” despite being backed up by audio files. The President also heaped praise on Prime Minister May and stated the he would help ensure that a “powerful” trade pact would happen "very, very quickly".

EU
Eurozone investor confidence, as measured by Sentix, rose to 12.3 in July, from 9.3 in June based on a survey of some 900 investors. The regional increase was against a consensus view that forecast a fall to 8.2. However, the underlying statistic for Germany showed a decline to 16.2 from 18.5, the sixth decline in a row and the lowest reading since February 2016. The agency, however, noted that the “development is unlikely to herald the start of a new upswing” given the potential for Trump to target the EU’s car industry through trade tariffs as he has threatened.

US
Jay Powell, the Chairman of the Federal Reserve, provided an upbeat assessment of the economy, and predicted that tax cuts and spending increases could deliver a “significant” boost to the economy at least over the next three years. He was, however, noticeable quiet on the trade concerns or worries over the shape of the yield curve. The yield difference between two-and 10-year US Treasuries hit 26.5 basis points, close to the lowest level since August 2007, just before the start of the Great Financial Crisis. A negatively-sloped yield curve usually predicts a recession is imminent.


PORTFOLIO ACTIONS

More changes were made in portfolios stemming from the latest formal quarterly discussions on asset allocation.

Further UK and European equity changes, the team has also added to our exposure of the S&P 500 through an index future. The team added 1% in terms of the value of the fund when the Balanced risk profile is taken as an example.

As part of our alternative asset approach, the team has also switched assets from the inflation certificates and instead are adding to the global inflation linked bonds The change results from our view on government bonds becoming slightly more positive, since we believe that higher inflation is now more reasonably priced in the market than it was in 2016 when we bought the inflation certificates.


THREE ANNOUNCEMENTS DUE THIS WEEK

18 Jul – UK Inflation Rate (Jun) // 18 Jul – EU Inflation Rate (Jun) // 19 Jul – US Initial Jobless Claims (Jul)

SOURCES: BLOOMBERG, EUROSTAT, REUTERS, 7IM

 

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The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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