May 14, 2019

 US President Donald Trump’s successive tweets on one of the most sensitive issues for the markets – US-Chinese trade negotiations – hit the markets hard over the past week after the US president decided to increase tariffs on Chinese imports into the US from 10% to 25%. This decision was preceded by threats through the three tweets, and with little time to undo those threats with the deadline last Friday, May 10, 2019, it caused difficulty especially since high-level Chinese negotiators were expected in Washington on Thursday and Friday. This meant that the increase in tariffs would occur just as the Chinese delegation was visiting with his negotiators, and shows the US President’s intention to exert maximum pressure on the Chinese to come to an agreement as soon as possible, and declare a victory for his domestic supporters. But a broader view of the current economic landscape may give us a more comprehensive explanation. Trade tensions between the US and China have shaken financial markets, but in the end, we still believe that an agreement is likely. Failure to get a deal, possibly along with an increase in additional tariffs, would be detrimental to both economies and would hurt stocks. But most importantly, such a scenario would be devastating to President Trump’s re-election chances in 2020, so we suspect that the last step is to extract last-minute concessions or is probably aimed at lobbying to speed up the whole process, and I do not think it is a serious attempt to provoke a trade war between the world’s two largest economies. Despite the ongoing uncertainty, the US economy continued to hold steady against all of these concerns after another strong GDP growth figure for the first quarter of 2019 as the economy added jobs in large numbers, and as the financial conditions of the US consumer improved, aiding continued gains in equities in addition to stability in the strength of the US dollar. The eurozone also saw stronger-than-expected growth in the first quarter, and although we rule out the possibility that a recession in the eurozone is imminent, at the same time growth does not seem likely, which indicates that the stability of the current economic condition is the most likely scenario during the next quarter. In the UK, there are many reasons for the widespread belief that the stalemate in Britain’s exit from the EU will not be broken before the Article 50 deadline at the end of October. Perhaps one of the most obvious reasons is the lack of time before the European elections began, as well as before the Conservative Party’s annual meeting, which is likely to see a heated battle for party leadership, so the extension of Article 50 may be more likely. But while we believe that a “no-deal” exit will be avoided, companies will have to continue to prepare, which will reflect a freeze on economic growth in the next quarter. While riskier assets rose from their earlier lows, the yield on 10-year US Treasury bonds did not move from 2.5%. For all this, I will assume that the previous variables on the economic landscape still tend to be positive for the US economy, which means that the Fed interest rate cut scenario is still out of the question, indicating that the risk balance is slowly swinging in the direction of the dollar reaching for new highs.

Highlights of the week:

From the US, where the Univeristy of Michigan’s consumer confidence reading may show an improvement in morale in May, while figures from the Census Bureau will show a likely improvement in housing starts and building permits for April after small declines in the previous month. Also, retail sales are expected to show modest progress, following the biggest one-and-a-half-year rise seen in March, while industrial production is set to rebound after falling in the previous month. From other important data; foreign trade prices, corporate stocks, the Empire State Industrial Index in New York, and the Philadelphia Fed Industrial Index. From Canada, the Bank of Canada will publish a review of its financial system. Also, the country will release April’s consumer inflation rate and the ADP employment change. From the UK, it’ll be the release of monthly wage data and unemployment figures. From the eurozone, where many European countries are due to release preliminary GDP figures for the first quarter of the year, including Germany, Finland, Poland, Norway, and the Netherlands, while the eurozone will publish its second GDP growth estimate. The largest economies of the bloc expanded by 0.4% in the first quarter after a halt in the previous period. Other important data includes eurozone industrial production, trade balance, construction production, and ZEW Economic Sentiment figures. To China, where updated figures for industrial production, retail sales, house price index and fixed asset investment will be published. From Japan, which will wait for the publication of housing starts, the current account, the leading economic indicator, bank lending, the survey of economic observers and the PPI. From Australia, investors will focus on employment figures, the Australian National Bank of Business Confidence Index, the Westpac Consumer Confidence Index, the rate of change in home loans, the wage price index and consumer inflation expectations.

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