Weekly Market Update

10/06/2019

Trade war negotiations accelerated last week while central banks came to the rescue with dovish comments on monetary policy driving equities ahead. Meanwhile, gold-backed exchange-traded funds had their biggest inflows in a year last week, as investors looked for safe havens amid the escalating trade war.

Following tense negotiations, the US and Mexico reached a deal to curb migration, defusing Donald Trump’s threat to impose sweeping tariffs on Mexican imports. This deal ends the tense eight-day period that began when Trump abruptly announced he was adding tariffs on all Mexican goods from June 10. The levies would begin at 5 per cent, then ratcheted up over the summer to hit a peak of 25 per cent in October. While Mexico has pledged to do more in terms of migration it does highlight how quickly and easily Trump can affect global trade and investor sentiment.

Markets appear extremely sensitive to the economic data at the moment. This is particularly highlighted in bond markets, where government bond yields continue to move towards record lows. Meanwhile, several central banks delivered dovish speeches last week including the US Federal Reserve, stating that they were closely monitoring trade developments and will act accordingly.

In the UK, Theresa May announced her plans to step down as Conservative Party leader, triggering a leadership contest that will deliver the next Prime Minister by late July. Whoever wins will face the same political challenges to achieve a deal before the October deadline. There was also negative news on the data front as the UK economy contracted by 0.4 per cent in April, a bigger drop than expected. This figure was impacted by the manufacturing sector which shrank by 3.9 per cent in April, the largest fall since June 2002.

Euro-area inflation eased more than expected in May, piling further pressure on European Central Bank policy makers as they assess a deepening slowdown and the need for stimulus. The backdrop is looking increasingly grim, with trade tensions damping confidence, hitting manufacturing and growth around the world. Concern about the outlook has pushed German 10-year bund yields to a record low. With interest rates already at 0 per cent and no fiscal levers to pull, options are somewhat limited. Turning the QE taps back on by the end of the year is an increasingly probable scenario.

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