Chief Investment Strategist
Market Update, Alan McIntosh
Better news on the trade front pushed equity markets higher last week. The US government granted Chinese exporters an extra two weeks before planned tariffs take effect, suggesting a thawing of friction between the two nations. Meanwhile the threat of tariffs on Mexican imports to the US was lifted after Mexico agreed to tighten security at its border with the US. The question of whether (when) the Federal Reserve cuts interest rates continues to take centre stage, with the easing of trade tensions arguing for less haste, while slowing economic indicators such as employment growth and weaker activity in the housing market point to potential action in coming months. Equity markets are still close to all-time highs and continue to assume that central banks will respond to keep the economic cycle from rolling over any time soon.
The febrile state of UK politics and in particular the extravagant election promises of Conservative leadership candidates (lots of snorting in derision!) has had little impact on markets. The UK stock market is more exposed to global factors and currency movements, although there are notable exceptions. Companies close to the government (as a customer) such as construction businesses have suffered badly through overexpansion and poor cost control, while property companies with shopping exposure have seen the value of their portfolios decline as the malaise in the high street intensifies. These are not “Brexit” factors but are specific to their industries. Nevertheless, businesses still seek clarity on what type of world they will be facing after 31st October. We are no closer to knowing the answer.
Economic Update, Richard Carter
The immigration deal struck between the US and Mexico has provided some short-term relief for investors and removed a potentially serious risk for the global economy. However, the fact that Trump has won some concessions from the Mexicans may embolden him further in his strategy of spraying tariff threats around willy-nilly whenever he feels like it. The focus will now switch back to the trade war with the Chinese ahead of the G20 meetings at the end of June but there seems little prospect of a deal at this stage.
The Mexican deal has reduced the need for a rate cut by the Federal Reserve but bond markets still see an easing in September as very likely. The Fed will be watching the data closely and recent statements from officials have become more dovish as the trade war has intensified. Last week’s US data, including the ISM and nonfarm payrolls, was certainly softer than expected but didn’t raise any major new concerns.
In the UK, the first vote in the Tory leadership race takes place on Thursday. Boris Johnson and Jeremy Hunt are the current favourites after a bad few days for Michael Gove but it could all change very quickly. Most of the policies being announced so far seem undeliverable or borderline delusional, and investors are very nervous about the prospect of either a general election or a no deal outcome in the autumn. Meanwhile, the UK economic data out this morning was shockingly bad with manufacturing production down nearly 4% on the year, and the economy contracting by 0.4% on the month as stockpiling came to an end and carmakers cut output.
This week, US inflation and retail sales numbers are released as well as Chinese activity data.
Investors should remember that the value of investments, and the income from them, can go down as well as up. You may not recover what you invest. This commentary has been produced for information purposes only and isn’t intended to constitute financial advice; investments referred to may not be suitable for all recipients. Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.