Weekly Market Update

09/07/2018

The rout in emerging markets continued last week, with China bearing the brunt. Shanghai-listed shares fell past a two-year low. Meanwhile, emerging-market currencies also struggled, forcing Chinese policymakers to make clear their intentions to keep their currency generally stable.

On Friday, the trade war between China and the US officially kicked off. Market reaction was limited given the extensive noise over the last few weeks. Although there were some jitters along the way, investors took heart from some strong economic data and from reports that the Trump administration might abandon the imposition of tariffs on European cars.

The US economy added more jobs than expected in June, but the unemployment rate snapped back from an 18-year low. The numbers still paint a fairly robust picture of the domestic labour market even with unemployment moving back to the 4 per cent mark. Wage growth is steady, up 2.7 per cent in June, from a year ago. A positive for risky assets is that the hard-economic data continues to be strong. The cycle remains robust, but trade wars are clearly a negative for sentiment.

Optimism over the strength of the US economy was further boosted by the minutes from the Federal Reserve’s June meeting. While policymakers flagged the ongoing trade tariff disputes as a rising concern, this was eclipsed by the central bank’s bullish assessment of the economy.

As the England football team battle ahead, Citi, the US investment bank, found that traded volumes could fall by as much as 50 per cent during these games, while the cost of executing trades increases sharply. This is likely to be the pattern as we head into the traditional summer period even as the competition draws to a conclusion.

The prime minister’s success in agreeing what looks like one of the softest possible versions of Brexit with the majority of her Cabinet, has been cautiously welcomed by the markets, with sterling steady. However, what quickly followed was news of the resignation of David Davis, Brexit Secretary, claiming that the PM had sold out to Brussels with her soft approach. The question remains whether we are actually leaving Europe or not!

With technology stocks appearing impervious to the global tensions, this was a good week for the Nasdaq. One Nasdaq stock to endure a rougher ride was Tesla. The driverless-car company announced that it had succeeded in reaching its production target of 5,000 Model 3s, but continued doubts about the safety of its vehicles and the sustainability of production drove its share price down over the week. Tesla remains one of the most shorted stocks on Wall Street.

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