Chief Investment Strategist
Market Update, Alan McIntosh
US stocks crept into record territory last week, although volatility returned as the news flow oscillated between positive and negative. The Federal Reserve suggested that an interest rate cut was not on the cards, at least for now, sending shares lower. Thereafter, strong employment numbers pushed markets higher, leaving the week showing a small positive for the broader US index. Yesterday, while the UK enjoyed a bank holiday, Donald Trump’s threat to introduce more tariffs on Chinese imports to the US initially sent markets spinning downwards, although there was some recovery towards the end of the day.
It is worth looking at each of these events to see why equity markets reacted the way they did.
Since the U-turn by Fed Chairman Jerome Powell on interest rate policy at the start of January, markets have been pricing in an interest rate cut later this year. This is based on an assessment of a slowing US and global economy and little evidence of inflationary pressure. Looser monetary policy is generally positive for share prices and indeed the US market has performed strongly in the past four months. However, first quarter economic growth was better than expected and therefore, unsurprisingly in that light, the central bank did not suggest a downward move in interest rates was likely any time soon. Hence the disappointment for the market. On the other hand, strong employment growth, with little sign of upward inflationary pressure through increasing wages, does not imply that further rate rises are imminent (what the market feared late last year, sending shares lower in Q4). A reason to be cheerful, therefore, pushing equity markets higher again.
The latest twist in the trade dispute tale comes at a time when the mood music from Washington implied that an agreement between the US and China was close to being signed. The President’s tweets to the contrary could be 11th hour posturing or it could mean that a trade deal is now looking less likely. The negative consequences for global growth of a ratcheting up of tariffs are what upset markets yesterday and today. The Chinese delegation, including the Vice Premier, is still expected to attend talks in the US later this week. Markets await developments.
Economic Update, Richard Carter
Global economic growth continues to be rather sluggish, especially outside the US, so the last thing we need now is a collapse in the US-China trade talks and the intensification of the trade war. However, the negotiations appear to have run into difficulty just as the two sides seemed to be edging towards a deal. Hopefully Trump’s tweets about putting up tariffs again this week will turn out to be last minute theatrics rather than anything more serious.
Elsewhere, Friday’s nonfarm payrolls confirmed that the US economy continues to enjoy a robust expansion with another 260k jobs created last month. There also remains little sign of serious inflationary pressure from wages despite the 49-year low in the unemployment rate so there is little prospect of a Fed rate hike for the time being. The news out of the Eurozone improved a bit too with better than expected GDP numbers and a rise in some PMIs, but it was pretty thin gruel.
In the UK, the Bank of England revised up their growth forecasts and suggested a rate hike may be on the cards at some stage. We have heard all this before a number of times and investors paid little attention to the utterances of Mr Carney. In all likelihood, the MPC will hike rates once Brexit is sorted out but when that will be is anyone’s guess. Talks between Labour and the Government will resume this week but there is no guarantee that whatever they agree will actually get through Parliament so there is no end in sight just yet.
Also this week: UK Q1 GDP and US CPI. US/China trade talks will resume on Thursday in Washington.
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