Weekly Market Update

04/06/2018

US President Donald Trump accelerated his trade war moves, increasing nervousness in markets. Not content with just the one trade war on his hands, President Trump provoked anger from several countries with his latest protectionist measures. Having previously granted a temporary stay of execution to major trading partners the EU, Mexico and Canada on metal import tariffs, trade talks failed to secure a permanent exemption. However, the market is becoming more familiar with this administrations’ negotiating tactics and as a result, rather than seeing a move straight into risk off trading, we are seeing some investors take a wait and see approach.

Italy’s President Sergio Mattarella gave his consent to a new populist government between the League and Five Star, with academic Giuseppe Conte as Prime Minister. At the beginning of last week, Italian equities sold off and government bond yields surged to 2012 Greek-crisis levels. The Italian banks, already struggling to get back on their feet, were hit hard and faced the threat of ratings downgrades. While these concerns were overstated the complacency around Italian politics and its banks in the last twelve months has prompted a sharp unwind in investor exposure to Italy.

By Friday, calm was restored as the two parties revived their coalition plans, proposing Giuseppe Conte as Prime Minister for the second time in eight days. Italy’s current political impasse may have passed, with the new government sworn in on Friday. However, investors will likely remain cautious on what’s to come from Italy’s first populist Eurosceptic coalition.

US jobs data was robust, with the number of new hires rising by more than expected in May, and with wages picking up, it certainty cements the likelihood of a further rise in interest rates by the Federal Reserve and suggest US corporate confidence remains robust despite the global tension spawned by Donald Trump’s protectionist trade measures.

The jobless rate dropped to 3.8 per cent, equal to the rate touched briefly in April 2000. Growth in wages firmed to 2.7 per cent from 2.6 per cent the prior month. The modest uplift in average hourly earnings will not fully dispel the question marks surrounding wages, which have failed to take off despite the ultra-low unemployment rate. However, President Trump stole the limelight after his decision to refer to the numbers before the release prompted a backlash, given that he had advance sight of the one of the world’s most market-sensitive pieces of economic data and was discussing it publicly.

Spain’s prime minister was ousted in a vote of no confidence following a corruption scandal. The vote handed power to the opposition Socialists, led by Pedro Sanchez, thanks to a narrow majority they held in the 350-lower seat house. Spain’s National Court found bribes were offered to former Popular Party officials in exchange for public contracts. Mr Sanchez has already committed to respecting a budget passed by Mr Rajoy. He has also promised to start talks with the Catalans over their bid for independence but said he will not give them another referendum.

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