7 August 2019

Who will blink first?

Markets have reversed their bullish trend recently, thanks in no small measure to the escalating trade war between the US and China.

President Trump’s announcement that further tariffs would be applied to Chinese goods prompted a decline in the renminbi. This almost inevitably brought the accusation from America that the Chinese government was manipulating their currency. Fears that all this will prompt a slowdown in global economic activity multiplied – hence investor nervousness.

While the reaction in markets was not as severe as that felt back in December last year, we nevertheless saw US indices, which had been at all-time highs, shed around 6% from the peak attained at the end of July. Our own FTSE 100 Index pulled back from over 7600 at the end of July to below 7200 at one stage. If trade wars really do metamorphose into currency wars, we should not expect an early resolution though, as so often is the case, life is not as straightforward as one might think.

China further ramped up the stakes by banning further imports of soya beans from America. This is a valuable crop for US farmers who will be hard hit by this move. And there’s the rub. With a Presidential election looming, the last thing Donald Trump will want is anything that might damage economic prosperity. Perhaps that is why a Presidential adviser told a business television channel that the White House was fully prepared to continue talks with China and could become more flexible over tariffs.

And its not just America that will be feeling pressure from the failure to secure an agreement on trade. It is all well and good for China to ameliorate the affects of tariffs by allowing its currency to fall against the dollar, but they have considerable dollar denominated debt which will cost more to service and repay as a consequence. It is believed the Chinese banking system is also short of dollars which will now be more expensive to acquire. There are no winners if this war is prolongued.

Economic news is thin on the ground, as one might expect in high summer, but trade really does seem to be taking centre stage. A spat between Japan and South Korea has resulted in Japan removing the Koreans from favoured trading status which in turn has brought about a boycott of Japanese goods in retaliation. It seems that trade wars are not confined to a Sino/American spat.

As for company news, there have been mercifully few adverse surprises recently, though the news that the New York luxury goods store, Barneys, has filed for bankruptcy demonstrates that the tough conditions for retailers is by no means confined to our own high streets. Brexit continues to rumble on in the background, with the increasing belief that a no deal exit from the European Union will take place, driving sterling ever lower. Not good news for holidaymakers, I’m afraid. 

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