With risk appetite waning, global equity markets were on the back foot thanks to heightened uncertainty over the prospects for a trade deal between the US and China. The pullback in equities has been relatively small so far but have come as a surprise to investors who have become focused on recent central bank rhetoric.
Hopes that a swift resolution to the US-China trade war was in sight were dashed after US President Donald Trump increased tariffs on Chinese goods implying that there had been an erosion in commitments by China. Tariffs on affected Chinese goods rose to 25 per cent from 10 per cent, almost immediately and Beijing vowed to retaliate. So far, the US trade deficit with China is almost 4 per cent larger in 2019 than it was at the same stage in 2018, at $83.5bn.
The US also increased rhetoric against Iran, sending warships to the region, which supported the oil price. Any significant escalation in Middle East tensions would likely push the oil price even further, to a level where it acts as more of a brake on already slowing global economic growth.
It remains challenging to differentiate between the noise and actual policy with President Trump, but many of the fights he has picked, with China, North Korea and Iran, remain unresolved and have the potential to escalate further. So far, the only thing that’s really changed this year is that the central banks have become more dovish. If we add geopolitical and trade tensions to that mix, the backdrop for risk assets becomes challenging and the flight to safe havens will likely continue.
In the UK, GDP rose 0.5 per cent month-on-month and 1.8 per cent year-on-year in the first quarter, in line with economists’ expectations. Meanwhile, the government confirmed that the European Parliamentary elections would take place in the UK on 23 May given there is not enough time for a deal to pass through Parliament. Theresa May continues to fight to stay in control while government MPs seem too busy fighting amongst themselves to find a compromise.
The European Commission lowered economic growth forecasts for the region. Overall, they expect the eurozone economy to grow by 1.2 per cent in 2019, with the continued weakness in growth blamed on tighter financial conditions, unresolved trade tensions, disruptions in auto manufacturing, social tensions and ongoing Brexit uncertainty.
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