This weekly report presents insights from our Global Investment Management team.
The time for speech-making and empty promises has passed between the United States and China.
In the early hours of Friday morning, the Trump administration allowed the timetable for the first round of tariffs to lapse and thereby go into effect, triggering a simultaneous retaliatory response from the Chinese government. The U.S. implemented tariffs on $34 billion worth of Chinese imports, while China has also taxed around 545 different items worth a similar amount. President Trump upped the ante by ordering another $16 billion worth of tariffs that would be enacted in two weeks, followed by another promise to tax an additional $200 billion worth of Chinese imports at 10%. If these added tariffs were to go into effect, the U.S. would be raising import prices on about half of all goods imported from China.
Financial markets have been taking the news fairly well so far. The S&P 500 Index has gained over 2% since the tariffs were implemented through yesterday due to a positive jobs report, while global stock markets returned a similar amount, according to MSCI data. The same data also shows that Chinese stocks also jumped higher on the news initially before declining around half a percent yesterday. Bond yields have stayed fairly steady with the 10-year Treasury yield floating close to 2.80%, while Chinese government bond yields have fluctuated significantly over the last few weeks. Investors seem to be coming to the harsh realization that the U.S.-China trade war is a reality. In the wake of the dispute, other countries have tried to unite toward the common goal of maintaining free trade. Germany and China have signed deals worth $23 billion to tie together two of the largest exporters in the world. The Chinese government has said the conflict has become “the largest trade war in economic history to date.”
While numerous countries have clashed with the U.S. on an economic front, Brexit and the U.K. have returned to the spotlight, due to yet another apparent policy fumble. Prime Minister Theresa May has altered the U.K.’s strategy for leaving the European Union, which is now being planned as a “soft Brexit.” The change in policy has not been taken well by her government leaders. Brexit Secretary David Davis, Foreign Secretary Boris Johnson, and two other Brexit architects have resigned over the new proposal, saying it is a betrayal to voters and not in British interests. The new deal was an attempted compromise between polarized cabinet members, but appears to retain more of the EU’s rules. Still, the strategy may not be enough for negotiators, and the deadline is fast approaching. The European Council is looking to settle Brexit in the next three months, and the official deadline for Britain leaving the EU is March 2019.
Geopolitics remains the most prominent risk for financial markets in the current environment. Our team continues to weigh the effects of the escalating trade war against certain positive economic data points along with the current path for global monetary policy. We recently reduced our exposure to foreign developed markets like Europe as well as emerging markets, opting to increase investment-grade floating-rate bonds across our strategies. The Global Investment Management team continues to see modest upward potential in stocks. While we may be nearing the end of the economic cycle, it doesn’t seem to be here just yet.
Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
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