Weekly Market Update

05/03/2018

Fears of an expanding trade war hit global markets last week after US President Donald Trump stated he would impose heavy tariffs on imports of steel and aluminium for a long period of time. Next week the president will sign an order imposing global tariffs of 25% on steel and 10% on aluminium, a move that could trigger retaliation from the EU and China. The trade protections may divert flows of Asian steel away from the US, boosting competition elsewhere and denting prices.

The new US Fed chair Jerome Powell rattled markets after he gave a straight-talking testimony last Tuesday to the US House Financial Services Committee. His optimistic assessment of the US economy caused markets to reassess the path of interest rate expectations. Clearly mindful of the probable stimulus effects of President Trump’s tax and government spending plans, Mr Powell vowed to guard against overheating. However, a gradual approach was reiterated although the precise definition of this was left to investors to interpret, paving the way for four rises this year. A strong US economy is great for confidence and jobs, but corporate America will have to absorb more expensive debt.

On the data front, fourth-quarter US GDP was, as expected, revised down by the Commerce Department to reveal a rate of expansion of 2.5 per cent, keeping it on track for a slow start to the year.

Sterling fell to its lowest level since mid-January after Prime Minister Theresa May rejected the EU’s latest draft text on the Irish border issue, which stated that in the absence of any agreement to the contrary, Northern Ireland stays in a customs union after Brexit and is subject to all EU rules and regulations. The text also left out any reference to an extended transition period, which the UK has requested.

In the UK, the number of unfilled jobs in UK job market reached a 17-year high in the final quarter of last year. At the same time, the unemployment rate is close to its lowest level since 1975, suggesting that there are few workers out there to fill positions, especially with immigration from the EU falling since the Brexit referendum.

So far, wage growth has been modest and continues to be outstripped by inflation. In 2017 pay rose by 2.5 per cent, unchanged from the previous year. But at its latest meeting, the bank cited survey data from the REC which found new hires receiving significant pay rises. Inflation could be stronger than expected which could make the bank reassess rates more quickly than is currently priced in.

The Japanese yen strengthened after the country’s central bank chief suggested a possible exit from its current easy-monetary policy in 2019 if targets were met. This was the first time a possible timing has been suggested.

Italian voters delivered a blow to the country’s political establishment, as the populist Five Star Movement and the anti-immigrant, Eurosceptic Northern League made sweeping gains in the general election. Although we wait for the final verdict, it appears that Italian politics will continue to be in disarray, with talks of a final coalition likely over the coming weeks. For now, markets remain calm with the exception of the Italian Banks.

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