Yuan a fight?

  • Weekly update
  • 2 minute read

Markets

  • US-China trade tensions weighed on global equity markets in GBP terms. The US fell the least, at -1.48%, followed by Europe (-2.00%), the UK (-2.13%), and Japan (-2.23%). Emerging Markets were the laggards down -3.71%.
  • UK gilts rose +0.87%, and UK corporate bonds fell 0.06%. European government bonds fell -0.04% in local terms, whilst US government bonds rose +0.41%.
  • GBP depreciated -1.33% vs USD, -1.57% vs EUR and -2.37% vs JPY.
  • In USD terms, the oil price fell -0.45% while gold rose +0.67%.

Macro

  • The US and China trade negotiation deadline passed without a deal agreed on Friday. With no deal in place, the US increased tariffs on $200bn of Chinese goods from 10% to 25%, with 25% threatened on an additional $325bn of goods. According to the US, the escalation was due to China allegedly reopening segments of the deal already agreed. China has retaliated with tariffs on $60bn of US goods. A prolonged escalation of the trade dispute is likely to weigh on Chinese growth, a concern for investors holding assets exposed to global growth.
  • UK Q1 GDP growth accelerated to 0.5% QoQ, equating to 1.8% YoY. GDP growth was bolstered by stronger than expected consumption growth, supported by a resilient labour market. Factory output rebounded significantly, as manufacturers built up inventories in case of a “No Deal” Brexit in March. Brexit related risk also resulted in very strong import growth weighing on net trade. Given the “one-off” nature of some of these effects, growth may decelerate from here. A resolution to Brexit negotiations before the October deadline seems unlikely at this stage.
  • US CPI inflation increased by 0.3% month-on-month, driven mainly by a rise in energy prices, which has lifted the YoY figure to 2% from 1.9%. While core services prices have risen, core goods prices declined -0.3% from the previous month, the steepest decline since November 2006. With wage growth decelerating and contained inflation, we do not see a catalyst for the Federal Reserve to adopt a more hawkish policy stance in the near term.

Our view

  • Global growth has weakened somewhat, but Chinese stimulus, better survey data and accommodative monetary policy lead us to expect growth to improve.
  • While geopolitical risk remains elevated, relations have thawed a little and we believe this remains an environment favouring equities over bonds.
  • Within our regional equity allocation, we favour those regions most attractively positioned to benefit from the improvement in the global growth dynamic.

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