Weekly Market Overview – Trade war concerns weigh on markets

Mon 19 Mar 2018

Both US equities and the US Dollar fell last week when multinational companies such as Boeing were hit as Donald Trump sought to impose new tariffs on China, pressing China to cut its trade surplus with the US by $10bn. As a result, there is an increased likelihood of a trade war between the worlds two largest economies. Markets were already jittery after the President had fired Secretary of State Rex Tillerson and appears ready to make other changes such as removing his national security advisor H.R. McMaster. In local terms US equities fell -1.2%, with returns in Sterling of -1.8% as the Pound gained 0.7% vs the US Dollar. In Sterling terms global equities fell -1.3%, with both UK and European equities down -0.8%. Emerging Market equities fell the least at -0.1%. However Japanese equities bucked the trend, gaining 1.3%. Nervousness in equity markets translated into falling government bond yields, with US 10Y Treasury yields down 4.9bps and UK 10Y Gilt yields down 6.3bps. Perhaps surprisingly Gold didn’t benefit, falling -0.7% in USD terms, with Metals also down -1.1%, while Oil gained 0.5%.

Credit spreads are the difference between the yield on a sovereign bond and that of a corporate bond. If the yield for a government bond goes up and the credit spread widens, it means that the yield on the corporate bond is increasing at an even faster pace than the sovereign, reflecting rising credit risk. Since the beginning of February credit spreads have widened, indicating stress in the corporate bond market. Our internal analysis suggests that over 10% of the US small cap companies have problems paying interest on their loans. As interest rates pull higher, that percentage could rise if earnings growth is not sufficient. The world has become addicted to credit at virtually zero rates. Higher rates could hit consumers who are not used to higher mortgage payments. They can also hit firms in the same way. As we progress towards interest rate normalisation, we should be aware that equities are not the only indicator of market stress and consider our entire asset allocation.

Please read our full Market Update Week 11