Monday 3rd June 2019
This week has demonstrated that politics remains as important as ever when it comes to markets – yet the level of media coverage should never be confused with true significance. In the week ahead in China, all media will be on lockdown to avoid any mention of the 30th anniversary of the Tiananmen Square crackdown. This in stark contrast to the blitz of publicity surrounding Donald Trump’s state visit to the UK this week, where his priority is to be received by the Queen, not the Prime Minister (Trump will meet with Theresa May on the second day of his visit, with the pair potentially holding a joint news conference).
European election results less radical than expected
Despite the populist surge seen in the UK during last week’s European elections, the results were in the minority, with the Brexit Party’s success being matched only in Italy. Matteo Salvini, leader of the winning party in Italy, the far-right League, called last week for a “fiscal shock” of tax cuts to boost the country’s growth. His words came as a letter from the European Commission was winging its way to Rome, which warned Italy was failing to make ‘sufficient progress towards compliance with the debt criterion’.
But beyond Italy and the UK, anti-EU parties fell short of their own electoral expectations. Chris Ralph, Chief Investment Officer at St. James’s Place, commented: “The fact that more populist or polarising parties like AfD in Germany or Le Pen’s party in France did less well than expected should help the UK’s Brexit negotiations. Moreover, as Europe goes through a period when growth is slowing, having more political certainty and less extremism will be positive for investors.”
Last week saw the commencement of the Tory leadership contest. However, the competition for the top job is fast becoming a “shamble” according to former minister Ken Clarke, with no less than 13 MPs announcing themselves as candidates at the last count. Over the weekend, Tory MP Sam Gyimah proclaimed his own candidature, and said he would call a confirmatory referendum on Theresa May’s deal (with both ‘no deal’ and ‘remain’ on the ballot paper). The other candidates are divided between those who say they would be willing to trigger a no-deal Brexit in October if no new deal is made, and those who say they wouldn’t. Though it remains far from clear whether either pledge could, in reality, be followed through.
Global trade disputes and economic data sap investor enthusiasm
Markets worldwide had a difficult week: the S&P 500, FTSE 100, EURO STOXX 50 and Japan’s TOPIX all slipped over the five-day period, against a backdrop of global trade disputes and economic data.
Maersk, the world’s largest shipping company, reported on the negative hit suffered by global sea trade as a result of the US-China trade war, as growth in the first quarter was less than a half the rate achieved in 2018. Trade war rhetoric between the White House and Beijing continued apace all the same. Indeed, the month of May as a whole (see ‘In The Picture’) was tough for markets from 5th May, at the very moment Donald Trump published an incendiary tweet threatening to levy more extensive tariffs on imported goods from China. Last week, China said it might retaliate by restricting US access to rare earth metals it buys from them – various rare earth metal companies saw their stock prices rise due to fears of supply reductions.
Exports are important for the technology sector, which may in fact be the true reason for the US-China fallout. After all, Alibaba last week chose Hong Kong over New York for its next listing (worth $20 billion). Meanwhile, in the same week Donald Trump made a state visit to Japan, Huawei was excluded from consideration for Japan’s 5G network building.
Chris Ralph, Chief Investment Officer at St. James’s Place, noted: “In the US, there is a focus on achieving something on trade in time for Presidential Elections in 2020, but probably not yet. China’s perspective is much, much longer, and is using its Belt and Road initiative to build relations with countries around the world. But this dispute is more about intellectual property and cyber security than trade itself, which isn’t necessarily being played out in the media headlines. I suspect this will go on into 2020.”
As it happened, Chinese stocks closed on Friday at the end of their worst monthly performance since October – even though the Shanghai Composite index actually ended last week higher.
The trade war is felt in Europe…
Europe is particularly susceptible to the emerging trade war, and last week the European Central Bank’s Vice President warned that a US-China trade war “could affect not only the volatility of markets, it could affect the real economy quite rapidly”.
Meanwhile, Fiat Chrysler confirmed that it is looking to merge with Renault, creating the world’s third-largest car manufacturer behind Volkswagen and Toyota. The planned merger may be complicated by Renault’s existing partnership with Nissan and Mitsubishi.
Last week, markets in Mexico fell in response to Donald Trump saying that the US would introduce a 5% tariff on imports from Mexico “until the illegal immigration problem is remedied” – a significant comment in its admission that tariffs are now being used for non-economic purposes too. Ripples were quickly felt in markets further afield.