Weekly Market Update: Global equities decline as trade war escalates

Tue 27 Aug 2019

Read our Full Market Update Week 34

Market Analysis

Last week equities continued to decline, both in local and Sterling terms. Emerging Markets led the decline, falling -1.5% in Sterling terms. US, UK and Japanese stocks fell -0.9%, -0.2% and -0.9% respectively. European stocks were flat in Sterling terms. Globally, the best performing sectors were Consumer Discretionary and Utilities, while Materials and Energy were the worst performers as oil prices fell. Overall, global stocks were down -0.7% as recession concerns, fuelled by weaker than expected manufacturing data, trade war escalations and the possibility of a no-deal Brexit, continued to weigh on risk assets. The US 10Y Treasury yield closed the week down at 1.535% as tariffs were escalated on $75B of US goods by China and further tariff hikes actioned by President Trump. The UK 10Y Gilt yield closed the week higher at 0.481%. Sterling was up +0.6% vs the Dollar and +0.5% vs the Euro. Gold was up +0.9% in USD terms, at $1,533 per ounce. Oil fell -2.2% to $54.0 per barrel.

CIO Analysis

G7 meetings have invariably been an event closely monitored by markets. Equally invariably they have been dismissed as inconsequential. This time around, however, it is worth a long term look. If anything, the lack of agreement even on basic issues like the Amazon rainforest fires (which degenerated into a personal feud between France’s Macron and Brazil’s Bolsonaro) indicates how fast we are moving from a multilateral to a bilateral world. What is the difference for us mere mortals? In a multilateral environment, there’s a general agreement on the long term strategic principles that should guide our path to the future, even if tactics may remain nationalistic and opportunistic. A bilateral world, by contrast, is one of short-term leverage and absence of long term planning. If you are the strongest in the room and you can take your opponents one by one, rather than let them coalesce, then you can produce clear (albeit short-term) wins. Mr. Trump’s New York tactics are perfect for this environment. Instead of discussing in open fora, he would rather negotiate individual agreements and use the full power of the Oval Office to “win”. The Office of the President of the US is the strongest in the world, and, in theory, it could bend the globe to its will. Why is that shift important for investors? For one, the obvious danger of this approach is that it is used internally as well, endangering key global institutions like the Fed. Another risk is that absence of long term planning means that long term issues, like the environment, remain unresolved. The most important consequence, however, is that it exposes the mercantilist tactics of other powers, previously hidden under the multilateral umbrella of the Pax Americana. By throwing its hat in the mercantilist ring, the US is threatening the economic models of its rivals. In this environment, countries that rely on mercantilism, namely exports, do not fare well. China, Germany, Japan and Korea have all been seeing manufacturing contract for months. So what if this is not just a cyclical phenomenon, but rather a consequence of the breakdown of the multilateral order? And if so, how long – if ever – will that order take to rebuild?

David Baker, CIO