Market Insights – 27th August 2018

Each week, a team of experts shares its market views with you.

USA and China flags hanging in front of business building

Essentials

The US health-care sector is on the verge of reaching a new record high, buoyed by investors’ appetite for this growth sector, which is relatively immune to the ups and downs of the macro cycle. We continue to be bullish on this segment, which offers clear growth prospects.

Europe’s PMI was almost in line with expectations. It rose slightly in August thanks to a moderate uptick in the services sector, which offset the decline in manufacturing. Despite fears of a trade war, the eurozone economy is growing at a brisk pace.

Italian bond yields reached a new recent high, reflecting the scepticism surrounding the fiscal measures that could be enacted by the new populist government and that would only add to the country’s already sizeable public debt. The risk of contagion should be kept in check, however.

Wall Street thinks America is great again!

This past weekend, the world’s major central bankers met in Jackson Hole for their annual gathering. This year’s event was a relaxed affair – a far cry from the urgency with which the central bankers met ten years ago at the height of the subprime crisis. There were no big announcements and no monetary-policy surprises, only a reiteration of recent messages. The Fed plans to continue gradually raising rates, while other central banks are getting ready to begin normalising their policies. For the Bank of Japan and the European Central Bank, the first move will be to stop printing money. There was some satisfaction with the pace at which the global economy is growing, but there were some concerns too, especially about the risk of an outright trade war waged by the USA. The world’s central bankers also seized this opportunity to share their worries about potential threats to their independence, which most recently have come from Donald Trump in the States. Wall Street doesn’t seem unsettled by these fears for the moment – some of its leading indexes, like the S&P 500 and the Nasdaq, have reached new record highs. The US stock market is back at its January levels, after several months of heightened volatility and major sector rotations. These new peaks suggest that the USA’s bull market is still in full swing. It is being buoyed by the country’s healthy economy, solid corporate earnings, rising yet controlled inflation and still-historically-low interest rates. What is striking is the growing gap between the US and other global stock markets, which are very far from their record highs. If Wall Street’s bull market continues, the rest of the world is likely to start catching up, especially if market momentum becomes more widespread and stops being propped up by tech stocks. A decline in trade tensions would also spark renewed interest in the countries that have borne the brunt of the US administration’s attacks and that are lagging farthest behind. The political pressure in the USA could ease once the mid-term elections are out of the way in November.

An eye for an eye, but how far will it go?

The second round of import tariffs came into force last week, with a total of USD 50 billion in goods now affected (USD 34 billion in July, then a further USD 16 billion in August). So far, China has responded with the same tariffs on the same amount of goods. But it will have to be more creative next time – it only has about USD 80 billion in US exports left to work with, which is well below the USD 200 billion being targeted by Trump in the next round.

If tensions increase further, the retaliatory measures will likely go beyond customs tariffs. China has so far refrained from threatening to bring in other counter-measures, as they could be double-edged. But sometimes you have to lose a battle in order to win the war. China could, for example, boycott US products, as it did with South Korea in 2017. This would hit tourism and US brands very hard. It could also go after the interests of US companies in China, or even, as a last resort, interfere with the dollar and with purchases of US Treasuries. At this point, these measures seem too far-fetched, but we can’t rule them out completely if the trade war continues. In the meantime, China has clearly turned its attention back to the stability of its economy rather than going after the shadow banking. The impact of this less restrictive policy should start to be felt gradually over the coming months

To go deeper

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