Review of the week: Get with the programme
Unlike with South American asylum seekers, tanks and razor wire won’t keep climate change from encroaching on your borders. Chief investment officer Julian Chillingworth looks at the latest US tariff threats.
Just when you thought Donald Trump had confined his trade bludgeon to China, the US president upended markets by threatening to slap broad tariffs on Mexico.
From 10 June, 5% tariffs will be levied on all Mexican exports to the US. They will ratchet up to 25% by 1 October if Mexico doesn’t curb the refugees streaming across its land toward the US. This punishment of Mexico – one of America’s largest trading partners – for allowing thousands of South Americans to cross the country on their way to the US has a lot of collateral damage. It’s bad for car manufacturers of all stripes because many have supply chains that straddle the US-Mexican border. These companies are American, European and Japanese, so this strategy will be hurting only friends (Mexico is still, nominally, a friend of the US as well, but you have to wonder for how long). The news sent the share prices of auto companies tumbling. These tariffs will also hurt main street because people will have to pay more for all sorts of goods. Oxford Economics calculates that the measures will shave at least 0.7% off US GDP growth by 2020, a significant reduction.
As for Mr Trump’s policies, this is exactly how we feared he would react to losing control of Congress. He is taking out his frustration by throwing his weight around in the one area where he is unfettered by checks and balances: trade. If this continues, the potential for a US recession and global slowdown would increase, leading to more volatile markets.
But perhaps worse than Mr Trump’s economic vandalism is that he fails to grasp the pivotal issues of the day. Mexican President Andrés Obrador is right when he said you can’t solve a social problem with taxes and punitive policies. People don’t abandon their homes for pleasure. For most people, leaving all you know and the people you love is traumatic, terrifying and a last resort. To be sure, many emigrants are adventurous and set off for pecuniary gain or glory, but even these intrepid wanderers live in fear of family emergencies unravelling a world away. In the developed world, immigrants have the ability to fly home semi-regularly at least – as long as they earn enough and haven’t strayed too far from the nest. For those who leave their homes in poorer countries, it could be forever.
Many of the refugees streaming north to America come from El Salvador, Honduras and Guatemala. These countries have been torn apart by drug wars and corruption. The US had its hand in some of these problems during the war on drugs and shady CIA operations of the 20th century. Another factor propelling people north is climate change. Global temperatures are rising and microclimates are in flux. Farmers in some South American and Caribbean nations are struggling to grow crops which they have depended on for centuries as conditions deteriorate. These countries are also being hit by ever more frequent and ferocious hurricanes.
America is not immune to the increasing fury of erratic meteorological patterns either. Its eastern seaboard has been hammered in the past few years by massive storms. Strange weather is affecting the heartlands too. This year, about 6 million acres of farmland are believed to have been waterlogged by incessant rain that has prevented sowing. That’s more than double the previous record from 2013. The price of corn has rocketed about 15% in just a couple of weeks.
According to numerous studies on climate change, these weather effects aren’t going away. In fact, they are forecast to get much worse as the concentration of CO2 in the atmosphere rises. If we are to mitigate the damage from the changing climate and come up with a more sustainable energy model, countries need to work together, not turn on each other. Happy, tolerant, prosperous nations have a better shot of dreaming up the technology, strategies and partnerships needed to pull ourselves back from the brink of catastrophic climate change. An angry, embittered and fractious world could drastically alter life as we know it within a century.
Thankfully, while Mr Trump is America’s leader, many of his countrymen aren’t following his lead. Mr Trump champions coal, has little care for the environment beyond a golf course, and dismisses climate change as a myth cooked up by the Chinese. But a recent Yale poll shows three-quarters of Americans accept the reality of global warming and they are becoming increasingly concerned about humans’ effects on the planet. This chimes with what our Global Sustainability Fund manager, David Harrison, noticed when he visited the US earlier this year. Suddenly, American company managers were talking about sustainability and its growing importance among their customers. As David says, “If American companies – some of the most profit-focused businesses on Earth – can be swayed to become sustainable, anyone can.”
Source: FE Analytics, data sterling total return to 31 May
Mr Trump arrives in the UK this week on a state visit that will cap Mrs May’s official reign as Prime Minister. While she will stay on as caretaker, she will be even more of an empty figurehead till one of her colleagues emerges victorious from the scrum of hopefuls. Mr Trump has already thrown his weight behind frontrunner Boris Johnson; we’ll have to see whether that’s a help or hindrance.
The UK releases a raft of economic data this week, which will help decipher how the nation is faring. The 10-year gilt yield slumped considerably in May and it was no different in the final week. From 1.19% at the beginning of the month, it ended at 0.89% on Friday. Government bond yields tend to fall when inflation or GDP growth is lower than expected or when other risks rise. Inflation undershot slightly last month, but remains above the central bank’s 2% target. PMIs, surveys of business’s output and confidence, are coming out today and tomorrow. They are one of the leading indicators of a nation’s upcoming growth. And then there’s the Halifax House Price Index on Friday. This measure has actually done quite well lately: forecasters expect it to jump 4.5% on a year earlier, following a 5% jump in April.
American ISM PMIs are coming out this week too, along with a couple of closely watched employment measures. After a nervy week for markets, reactions to these numbers could be more than a little knee-jerk. Keep an eye out for Chinese retaliation on the trade war front as well. Rumour has it that China may soon restrict exports of important rare earth metals to the US. You would never have heard of any of these minerals, yet they are crucial for all sorts of hi-tech devices from missile guidance systems to the smartphone in your pocket. They are also used to refine US crude oil into petrol and to build wind turbines. Between 2014 and 2017, China supplied 80% of America’s imports of these rare earth metals.
Over in Europe, things are hotting up between the EU and Italy. Last week the European Commission said it was starting disciplinary proceedings against Italy for its refusal to rein in debt. This could end in what is effectively a €3.5 billion fine (£3.1bn) and yet more fiery rhetoric between the two. The strain could be too much for Matteo Salvini’s left-right coalition, especially considering the internal battle raging over a planned introduction of flat taxation, sell off around €18bn of government assets and implement other reforms. If the tie-up collapses, there may be yet another election in Europe this year.
UK 10-Year yield @ 0.89%
US 10-Year yield @ 2.12%
Germany 10-Year yield @ -0.20%
Italy 10-Year yield @ 2.67%
Spain 10-Year yield @ 0.71%
Economic data and companies reporting for week commencing 3 June
Monday 3 June
UK: PMI Manufacturing, BRC Sales Like For Like
US: Wards Vehicle Sales, ISM Manufacturing & Employment & Prices Paid, Construction Spending
EU: PMI Manufacturing
Final results: Tatton Asset Management
Tuesday 4 June
UK: PMI Construction
US: Factory Orders, Durable Goods Orders, Capital Goods Orders
EU: Unemployment Rate, CPI
Final results: AO World
Wednesday 5 June
UK: New Car Registrations, PMI Services
US: PMI Services, ISM Non-Manufacturing
EU: PMI Services, PPI, Retail Sales
Final results: Alpha Financial Markets Consulting, GB Group, Workspace Group
Interim results: Impax Asset Management
Thursday 6 June
UK: BoE’s Mark Carney speaks in Tokyo
US: Nonfarm Productivity, Unit Labour Costs, Trade Balance
EU: Gross Fixed Capital, ECB Rate Decision
Final results: Auto Trader Group, CMC Markets, First Property Group, Mitie Group
Trading update: Go-Ahead Group, Joules Group
Friday 7 June
UK: Halifax House Price Index
US: Wholesale Trade Sales, Consumer Credit
EU: Labour Costs