Weekly Market Overview – Despite scheduled talks, looming trade war roils markets

Mon 26 Mar 2018

Donald Trump’s announcement of around $60bn of tariffs against China due to intellectual property violations saw markets experience large losses, as participants feared an escalating trade war. China is expected to hit back with levies aimed at industries and states where Mr Trump’s supporters are concentrated. Equity falls came despite Congress agreeing a $1.3tn spending bill which meant a government shutdown was avoided. With Sterling rallying versus major currencies, returns for GBP investors were even worse: US equities returned -7.3%, European equities -4.3%, Emerging Market equities -4.8%, Japanese equities -4.6%, with UK equities relatively unscathed, down -3.3%. The risk off environment saw US 10Y Treasury yields fall by 3.1 bps and German 10Y Bund yields fall by 4.4bps, although UK 10Y Gilts yields rose 1.6 bps as the Bank of England hinted at a rate hike at its next meeting. In USD terms Gold rallied 2.5%, Oil gained 5.6%, while Metals fell -2.6%.

Von Cllausewitz wrote that “War is an act of violence intended to compel our opponent to fulfil our will”. On Thursday and Friday markets fell again, with the S&P 500 hitting its 200 day moving average for the second time in as many months. The reason this time was the rise in trade tensions between China and the US. President Trump imposed $50bn worth of tariffs on China, citing chronic infringement of intellectual property rights. This, some investors believe, is the opening salvo to trade wars which could upend the current economic and market cycle. As with any event-driven risk, as long term investors we must wait for it to play out. Mr Trump’s style of threat-then-compromise is a well known tactic to gain leverage in an upcoming negotiation. The Chinese are aware of that, which is why their retaliation was surprisingly benign. So far we only have skirmishes, meant to pre-empt discussions, not actual wars. They would only turn into wars if the will of either side is not fulfilled.