Escalating trade war continues to make its mark on markets

 

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Escalating trade war continues to make its mark on markets

Concerns over rising trade tensions between the United States (US) and China continued to dominate markets this week. Over the weekend President Trump announced that the US will limit the investment that overseas investors can make in US companies, including start-ups.

This caused the technology heavy Nasdaq index on Monday to fall 2.1% in a day, its biggest one day fall since April.

However, by Wednesday, the US administration was seemingly rowing back from this policy, as pro-business advisers within the administration were reportedly winning the argument against it. Nonetheless, this set the scene for markets over the week, with most equity markets in retreat, whilst safe haven assets, such as government bonds, were in the ascendency.


Equity markets and bonds

Most equity markets in negative territory for the week

Over the week up to 12pm London time on Friday, the S&P 500 index fell 1.4%, whilst the technology heavy Nasdaq Composite index fell 2.5%. Within Europe the EuroStoxx 600 fell 1.3%, whilst the UK’s FTSE All Share was relatively defensive, only falling 0.4%, however, this masked further falls in Sterling as Europe began to publicly prepare for a hard Brexit, due to the lack of progress made on the negotiations to leave the European Union. At its lowest point, Sterling fell to $1.306 to the US dollar, and €1.125 versus the Euro, now trading at $1.314 and €1.129 respectively. MSCI Emerging Markets fell 3.8%, with the Chinese ‘A’ share market having entered into bear market territory by Thursday.

The Shanghai Composite index has fallen by over 20% from its high for the year in January, driven by a slowing economy and the ratcheting up of the trade dispute with the US.

Whilst Government bonds shine

Government bonds rallied this week, with 10-year bond yields for US Treasuries trading at 2.84%, UK Gilts 1.27%, and German Bunds 0.32%. However, not all ‘safe haven’ assets had a good week, as Gold continued its downward move, falling a further 2% intra week, before recovering a little by Friday, now trading at $1,250.7, its lowest level in six months.


China

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Chinese take steps to bolster their slowing economy in the face of US trade tariffs

The Chinese central bank lowered the reserve ratio requirements for large banks in China by 0.50% this week, a move that is expected to inject Rmb 700bn of liquidity into the economy. Although no link was made by the Chinese authorities publicly, these cuts are due to come into effect on the 5th July, coinciding with the date that US tariffs on Chinese goods comes into effect.


Commodities responds

Energy stocks rise despite OPEC agreeing to raise supply by 1m barrels a day

Energy stocks were an out-performer this week, despite OPEC (Organisation of the Petroleum Exporting Countries) and Russia agreeing to raise output by 1m barrels a day. The oil price has risen strongly of late due to rising demand coupled with reduced supply from Venezuela because of chronic underinvestment, and the re-introduction of sanctions against Iran by the US. The oil price dipped as low as $73 last week, but has rallied again this week on news that US crude inventories had fallen sharply, coupled with reports that the US is pushing for all countries to halt Iranian oil imports by November 4th, or face sanctions.

Over the week, the MSCI World Energy index rose 2.8%, whilst Brent crude is trading at $78.8 a barrel, and US WTI (West Texas Intermediate) is trading at $73.3 a barrel, its highest level in over 3 ½ years.

In other news

Theresa May

Are football fans due for disappointment?

Whilst England have made it through to the knockout stages of the World Cup, with relatively little drama for once, are fans enjoying a beer in the hot weather due for disappointment? A shortage of carbon dioxide in Europe has emerged as at least five gas producers across northern Europe have shut down for maintenance, with the UK the hardest hit with only one major CO2 plant in operation. The shortage has begun to affect beer production with some pub chains saying they’re out of popular brands such as John Smith’s or Strongbow. However, the British Beer and Pub Association has advised drinkers to “Keep calm and carry on”.

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