Friday, 23rd of August 2019
“Every new beginning comes from some other beginning’s end.”
– Marcus Annaeus Seneca
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Stock markets were in recovery mode this week, paring back some of the heavy losses sustained since the US-China trade war took a turn for the worse in early August. Over the weekend, President Trump suggested that the US was “doing very well with China and talking!” in a somewhat cryptic tweet that was widely interpreted as hinting at positive developments in recent talks. (However, it may have been published just to reassure markets that the Donald had his eye on the Dow as well as his base after the index fell 800-points in a single trading session the Wednesday prior). American and Chinese officials have been in discussion ever since they failed to break the impasse in the last round of meetings between top trade negotiators at the end of July. Further meetings are scheduled for next week and, should those meetings go well, the two superpowers may take another shot at clinching a deal before the end of the year. However, we do not recommend that you hold your breath as manifest obstacles remain. Moreover, Trump’s off-piste decision to levy additional 10% tariffs on $300bn of Chinese goods not currently subject to special measures has elicited a forceful response. This afternoon (23/08/2019) China announced that it would impose retaliatory tariffs on $75bn of US goods including an extra 5% tax on soy beans and oil. Some are due to come in on 1 September and others on 15 December, mirroring America’s implementation timeline for their own set of tariffs. China will also resume 25% tariffs on US autos from December. Looking ahead, we doubt that the final chapter in the US-China trade war has yet been written. The dispute could well continue until after the 2020 election given the incentives that both sides face in this political cycle.
So far in August, investors and traders have been forced to navigate significant stock market volatility, with a lack of liquidity amplifying any moves in major indices. Mixed data, caustic Trump tweets and an inversion of the US sovereign curve all bear responsibility for the challenging late summer environment. However, we believe that the market reaction has been unjustified. It also says a lot about investors’ collective state of mind as we pass through the second half of the year. To be sure, we do not welcome the re-escalation of trade tensions between the US and China, or the Brexit stand-off and ‘no deal’ blame game now underway; we analyse the same data and leading indicators as everyone else; and we recommend taking a cautious approach to equities as the cycle drags on and investors get itchy trigger fingers, selling at the first sign of trouble. However, we also try to keep things in perspective and cut through the noise that defines the Trump era. Moreover, when you drill down into the economic data – as we did in these pages last week – the picture is rather better than the bond market and the doom-mongers would have you believe.
There are two events this week that certainly do deserve your very close attention. Namely, the annual economic symposium hosted by the Kansas Fed in Jackson Hole, Wyoming, and the G7 Summit of world leaders in Biarritz, France. At the former, Fed Chair Jerome Powell made a speech on the US economy and how to conduct monetary policy in the face of low inflation, low growth and the effective lower-bound on interest rates. Powell’s speech was somewhat academic, and the intricacies of his argument have had little impact on markets. However, many investors watched it closely to discern any hint of where he expects rates to trend this year. Fed minutes released this week revealed that at the July FOMC meeting, most of those in favour of a rate cut saw it as a mid-cycle policy ‘recalibration’ and not the first step on a ‘pre-set course’ towards further easing. A couple of members were in favour of a bigger 50bps cut given weak inflation data, but more were in favour of keeping rates on hold than took an ultra-dovish stance. With the market swings of early August and the threat of additional tariffs looming, some expect the Fed to adopt a more dovish approach going forward. But while the data look good, Powell should keep his options open. And in today’s speech, he did just that.
The G7 Summit will be rather a less academic affair, but no less important – even if it only serves to highlight how dysfunctional the ‘rules-based international order’ has become. The UK will undoubtedly have some testy exchanges with the EU over Brexit; France and Brazil are expected to clash over the fires raging in the Amazon rainforest; and everyone is expected to disagree with the US over something. Whether all parties will reach a common statement at the end of the summit is hard to say and a surprise disagreement cannot be ruled out. Perhaps Trump will offer to buy Gibraltar, so the regular guests at Mar-a-Lago Greenland have somewhere sunny to go for those long, dark, cold winter months…
The final subject for this week’s newsletter is the small matter of Italian politics. The government has (unsurprisingly) collapsed after the right-wing strong man leader of the League, Matteo Salvini, called time on his party’s unstable coalition with populists Five Star. The marriage was never a happy one given the lack of policy overlap between the two parties, and it lasted just 14 months in the end. During that time, Salvini has become the most popular (if most polarising) politician in Italy by attacking the EU and adopting a hard-line anti-immigration stance as Interior Minister. At the same time, the League has risen sharply in the polls and secured victory in the European Parliament elections in May. Indeed, polls suggest that the party would come close to an absolute majority if an election were held today (although it would still probably end up in coalition with Berlusconi’s Forza Italia and the far-right Brothers of Italy Party). Salvini has spent much of the summer combing Italy’s beaches, often topless and slightly burnt, apparently campaigning for an election that he claims not to have sought. In his resignation speech, Italian PM Giuseppe Conte accused Salvini of looking for any opportunity to collapse the government and trigger another election. Five Star and the centre-left Democratic Party or PD (i.e., Renzi’s lot) have agreed to enter into coalition talks with the aim of creating a new government to support the PM and stop Salvini forcing an early election. This a stunning reversal given the traditional hostility between the two parties – and the talks will likely fail. An election could provide Italy with a more coherent government able to at least begin to grapple with the country’s myriad problems. But we are not there yet.
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