LAST WEEK – KEY TAkeAways
US and China exchange new trade tariffs
- Low-level trade talks continued between the US and China, as the US imposed additional tariffs of 25% on $16 billion worth of Chinese goods, and China responded in kind;
- Despite the tariffs, Chinese exports beat expectations by rising 12.2% in July and imports grew by 27.3%, leading to a surplus of $28.1 billion;
- The US share of Chinese trade fell 40 basis points from 19.7% to 19.3%;
- Omnis view: The countdown continues to the deadline for the next round of tariffs on $200 billion worth of Chinese goods, and President Trump remains typically unpredictable in his policymaking decisions. Notably, the US share of Chinese exports has only dropped slightly, while the jump in Chinese imports may be partly explained by Chinese companies front running the US trade tariffs.
Core US inflation rises as election outcome in Ohio hints at closely contested mid-terms
- Core US inflation, the measure monitored by the Federal Reserve, rose in July according to the Consumer Price Index reading released on Friday, while headline inflation remained elevated;
- A tight congressional election race in a traditionally conservative district of Ohio looks to have been narrowly won by Republican candidate Troy Balderson (subject to a provisional ballot count), suggesting the mid-term elections in November, which determine control of the House of Representatives, could be more open than expected;
- President Trump acknowledged that his son and other advisers met with a Russian lawyer before the 2016 presidential election to gather information on his Democratic opponent Hillary Clinton, despite earlier claiming it was related to Russian adoptions;
- Omnis view: Inflation has ticked up in the US and with low unemployment putting upward pressure on wages, the likelihood is increasing of a hike in interest rates at the Fed’s next meeting in September. On the political front, if the Democrats take control of the House of Representatives, President Trump’s attention will be more consumed by domestic politics.
Sterling weakens over Brexit concerns as the UK economy rebounds
- Sterling dropped to a twelve-month low against the US dollar and euro amid uncertainty about Prime Minister Theresa May’s ability to negotiate a deal with the EU;
- The EU could scale back a proposal which would give it considerable legal power over Northern Ireland to help overcome one of the biggest obstacles facing Brexit negotiators;
- The UK economy rebounded after a slow start to the year, growing by 0.4% in the second quarter as retail sales and construction benefited from the good weather;
- Omnis view: Despite the market’s concerns, we believe the UK and the EU will come up with a last-minute solution to avoid a ‘no deal’ Brexit. In a soft Brexit scenario, certain UK asset valuations appear attractive. Meanwhile, there was encouraging news for the UK economy, as the underlying factors driving growth appeared robust.
S&P 500 surges ahead as founder hints at plans to take Tesla private
- The S&P 500 closed just short of record highs on Wednesday, propelled by rising oil prices and optimism about corporate earnings;
- Elon Musk announced on Twitter that he is exploring plans to Tesla private, shortly after Saudi Arabia’s sovereign wealth fund took a sizeable stake in the electric carmaker;
- Disney missed expectations for earnings and revenues in the second quarter, as it boosted spending on its streaming service designed to rival Netflix;
- Omnis view: While fundamentals remain strong, tax cuts are driving the US stock markets in the short term. However, the US will eventually have to address the growing deficit with higher interest rates which could slow economic growth.
Italian budget rattles bond markets
- Yields on Italian bonds spiked as the country’s populist coalition government started negotiating its first budget;
- Elsewhere in the EU, the European Central Bank released a report highlighting how a recovery in the job market should boost personal and corporate spending in the region, a key driver of economic growth;
- Omnis view: Although Italy’s coalition partners come from opposite ends of the political spectrum, they could both be described as Eurosceptics. Markets will closely monitor the negotiations for any hint of defiance and a potentially disruptive outcome.
Pressure on emerging markets as US doubles tariffs on Turkish steel
- President Trump increased the pressure on Turkey to release an American pastor under house arrest in Ankara by doubling tariffs on steel imports, causing the lira to weaken further;
- Following the withdrawal of the US from the 2015 nuclear deal, President Trump reinstated economic sanctions on Iran;
- The US President imposed new sanctions on Russia following the poisoning of Sergei Skripal and his daughter Yulia in March;
- Omnis view: Tensions with Turkey will only cause greater uncertainty for emerging markets which are already struggling with a strong US dollar and the impact of trade tariffs. Emerging market valuations are attractive however. Meanwhile, President Trump’s confrontational approach to foreign relations continues, as he attempts to apply his ‘brinkmanship’ negotiating tactics in the sphere of global politics.
LOOKING AHEAD - TALKING POINTS
UK and US publish key economic data
- UK unemployment data is released on Tuesday, followed by inflation on Wednesday: with most economists predicting an annualised rate of 2.5%;
- July’s US retail sales data comes out on Wednesday, and Japan publishes its latest balance of trade report on Thursday;
Omnis view: Record-low UK unemployment may be keeping inflation above the Bank of England target, but we do not believe hiking interest rates in the near term would not work the country’s favour, as it would hinder economic growth which is already weighed down by uncertainty about Brexit.
UK Inflation Rate (August 2013 – July 2018)
Source: Trading Economics and Office for National Statistics, August 2018
Brexit negotiations resume
- Brexit negotiations resume in Brussels on Thursday with the Prime Minister taking the lead for the first time after the resignations of Foreign Secretary Boris Johnson and Brexit Secretary David Davis;
- Elsewhere in Europe, Germany releases preliminary gross domestic product (GDP) data on Tuesday, which markets will watch closely for any impact of global trade tensions;
- Omnis view: With sterling weakening further against the US dollar and euro, Mrs May will be keen to make her mark as she takes over Brexit talks. Whether or not she manages to make progress remains to be seen.
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