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Weekly comment: 13.05.2019

Market Update, Alan McIntosh

“Just when you thought it was safe to go back in the water….”

For someone who saw the movie Jaws when it was released in 1975, I remember this quote from the cover of the book upon which the film was based. Like many others, I have used it on numerous occasions since. The most recent is in the context of Donald Trump’s introduction of fresh tariffs on Chinese goods exported to the US, late last week. Despite trade talks continuing on Friday, Trump claimed that the Chinese had backtracked on some major issues and that as a result, no agreement had been reached. The penalty was the imposition of the previously threatened, but subsequently delayed, tariffs. So far, the stock market reaction has been fairly muted, with the World Index falling less than 3%.

Why such a relatively small move?   

The over-arching belief is that this is yet another negotiating tactic and that a face-saving deal will eventually be agreed. Both sides seem to indicate the necessity of this, so the market is behaving as if it is a delay, rather than a cancellation. Nevertheless, this heightening of uncertainty could increase short-term volatility in markets over the next few weeks. Investors should remember however, that the strong rally in stocks over the past four months was mainly a result of the US central bank, the Federal Reserve, changing its messaging on interest rate policy to a more accommodative stance. Should the trade talks prove more difficult to resolve than expected, with a resulting negative impact on economic activity, the market assumption of a US interest rate cut later this year is more likely to become reality. This would certainly cushion some, if not all, of the blow from the failure to reach an accommodative agreement over the next few months.

Economic Update, Richard Carter

The outlook for the global economy has worsened following the failure of the latest round of US / China trade talks. This has come as a disappointing surprise for investors because the comments from officials had been very positive in recent weeks and a deal seemed close. Instead, the two sides are now engaged in a war of words with the US suggesting they will next raise tariffs on another $300bn’s worth of Chinese goods and retaliation would no doubt follow. There are no more formal talks planned although there remains hope that a meeting between Xi and Trump could be arranged at the G20 event in late-June to break the deadlock.

The economic impact of the trade war is hard to quantify but global growth and confidence is rather fragile at the moment so the timing is not great. It is quite possible though that the blow will be softened by further stimulus in China and an interest rate cut by the US Federal Reserve. This latter prospect would have seemed outlandish at the start of the year but is now gaining credence with bond markets pricing in a 70% chance of a cut by year end. The Fed certainly has room to manoeuvre with inflation at a fairly benign 2% despite record low unemployment.

Elsewhere, UK economic data continues to hold up pretty okay with GDP growth of 0.5% in Q1, although a lot of this was down to stockpiling. Brexit talks are set to continue this week but seem to be going absolutely nowhere while the Tories have plummeted in the polls and seem to be heading for oblivion in the EU elections. If Labour do pull the plug on the talks, it is hard to see what options Theresa May has left. Also this week, US retail sales and Chinese activity data will be released.

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.

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