Markets & Key Events
23rd March 2018
Protectionism leads markets lower
News flow over the week quickly moved on from data privacy concerns over Facebook to protectionism as the United States (US) Trump administration announced the latest round of import tariffs, targeting $60bn of Chinese imports on the charge of Beijing pursuing a strategy of unfairly acquiring US intellectual property. This followed the US Federal Reserve (Fed) raising rates as widely expected by 0.25%, taking rates to between 1.50% to 1.75%. However, despite flagging expectations of an additional rate rise in 2019, the tone of the Fed’s forward guidance was not as hawkish as many had assumed. The Bank of England left rates on hold on Thursday, despite strengthening wage inflation, although expectations are rising for a hike in May.
As of 12pm London time on Friday, the S&P 500 fell 3.9% over the week, falling 2.5% on Thursday alone, its largest one day fall since February. The EuroStoxx 50 index fell 4.1%, United Kingdom’s FTSE All Share lost 3.4%, Japanese Topix index fell 4.1%, Australian S&P/ASX 200 fell 2.2%, whilst the Emerging Markets lost 1.4%, with the Chinese Shanghai Composite index falling 3.6%.
Government bonds up
The safe haven status of government bonds returned this week, with the yield on the 10-year US Treasury now trading at 2.82%, having briefly spiked above 2.92% on Wednesday ahead of the Fed’s interest rate decision. The yield on 10-year UK gilts fell to 1.43% (yields moving inversely to price) having briefly touched 1.55% on Wednesday. Similarly, German 10-year Bunds are now trading at the same level as they were in early January, yielding 0.53%. Gold also exhibited haven status, rising 2.3% over the week.
Facebook tumbles almost 11% over the week
At the start of the week Facebook was firmly in the crossfire on news that data on the website had been accessed and used by Cambridge Analytica, an analytics firm, to help win the US presidential election, amongst other high-profile campaigns, including the UK’s referendum on EU membership. Facebook shares fell over 8% on the day, before tumbling further on Tuesday. By the close on Thursday, the shares had suffered an almost 11% loss.
UK EU 21-month transition agreement leads to a rally in Sterling
Sterling almost touched $1.42 to the US dollar after the UK and European Union (EU) announced that a 21-month transition had been agreed post the official Brexit date, 29th March 2019. However, to date, some of the more contentious points, such as the Northern Irish border, the ability of UK financial service companies to continue trading in the EU or the involvement of the European Court of Justice in UK law, have yet to be resolved. Additionally, as much as Sterling has rallied versus the dollar, versus the Euro it is a somewhat different story. Sterling is now trading at €1.14, having started the year at €1.12, a gain of less than 2%.
On Friday, the Chinese Ministry of Commerce said it was planning tariffs on 128 US products, worth around $3bn, including a tariff of 15% on US steel pipes, fresh fruit and wine, and a 25% tariff on pork and recycled aluminium. To date, this represents a small retaliation by China, but it is in response to the earlier US tariffs on steel and aluminium imports. Markets will have to wait to see what reaction China takes to the latest news.
Materials sector drags Australia down
On Friday, the Australian stock market suffered its worse one day fall in six weeks, with the S&P / ASX 200 finishing the week down 2.2%. With the announcement that the US will impose tariffs on China, Australia’s biggest trading partner, Materials were the worst hit sector, plunging 2.7% on Friday alone. Notably, miners BHP Billiton and Fortescue Metals dropped 3.1% and 2.9% respectively.
Elsewhere, there was positive news for the economy. Firstly, the Department of Finance announced that the Budget deficit has improved dramatically, shrinking to a 9-year low. In the twelve months to February 2018, the Budget deficit stood at 18.6 billion AUD, with the improvement helped by the rise in commodity prices and corporate earnings. Also in news this week, Australia’s remarkable employment record continues, as employment figures rose for a 17th straight month. 17,500 jobs were added in February after rising by 12,500 in January.
Crude oil climbs higher
The oil price rose strongly over the week with Brent Crude climbing 4.3% and West Texas Intermediate (WTI) rising 3.5%, with Brent now trading at $69 a barrel and WTI $64.5. The rise was supported by an unexpected drop in US crude inventories last week, and continued speculation that the US will withdraw from the US Iran sanctions deal. This was further bolstered by the news that President Trump has replaced General HR McMaster as his national security adviser with the foreign policy hawk John Bolton, signalling a further lurch to the right. This is Trump’s third national security adviser in a little over 14 months.
Changes to the portfolios
We have made no changes to the portfolios over the week.
Issues under discussion
The continued march of protectionist policies by the White House are not welcomed by global markets. To date we are mindful that in totality, they remain relatively small in the context of global trade, and from Trump’s perspective, everything is a negotiation. Trump will continue to test the boundaries until he gets pushed back, and then he will amend and move on. Therefore, we remain hopeful that these latest tariffs get watered down before they are implemented, although we recognise that this has the potential to escalate further, damaging global growth. However, as Trump will quickly find out, as much as he tries to punish China, it will often have a direct negative impact on US consumers as so much of the emerging world is embedded in US supply chains.
A number of countries have been exempted from the steel and aluminium import tariffs previously announced until the 1st May 2018, including the EU, South Korea, Australia, Canada, Mexico, Argentina and Brazil. We expect further such deals to be struck going forward and is exactly why we have maintained a well-diversified portfolio whilst there is so much uncertainty under the Trump presidency.