Review of the week: The lost art of compromise
As investors return from the long Easter weekend, Rathbones chief investment officer Julian Chillingworth considers the prospects for compromise as tariff wars and Brexit negotiations continue amid rumours of another plot to oust Theresa May in our latest Review of the Week.
In a compromise, no one is completely happy, but everyone should be better off than they would be without one. The long Easter weekend with family may have called for some – you may have had to play your least favourite board game, but negotiated lamb for dinner. Can the world’s superpowers reach a compromise, as they move tentatively towards a meeting between President Trump and President Xi?
US and Chinese officials will continue face to face talks with the aim of having agreed a deal ahead of a planned meeting between Presidents Trump and Xi. The current key sticking points appear to be around monitoring by both sides and whether the US and China will drop all tariffs on each other’s exports.
We still don’t have an exact date for the all-important meeting between Presidents Trump and Xi to sign that deal off, but speculation is that it will be pushed back to June. This particular deal may be about to benefit from the US President’s reliable sense of self-interest – his re-election campaign is getting going and he’ll want some good headlines about China buying more US soybeans and the like to take the credit for.
If Mr Trump can get the China deal sorted, he may then turn his gaze to auto tariffs which could affect Japanese and European auto manufacturers. The US President has taken to Twitter to accuse the European Union (EU) of taking advantage of the US over trade for years, to which the EU Trade Commissioner has responded with a measured, non-social media-based statement.
Hopes are not running high for a compromise in US-Japan trade negotiations either. Trade representatives from both sides plan to meet again this week, but a way forward is unclear. Automobiles are the real sticking point, as the Japanese want lower US tariffs on parts and finished cars and the Americans want lower imports and more US production. Japan may suggest it increases investment in US vehicle production, but it seems unlikely to accept any sort of voluntary restraint on exports.
As these issues are played out the global stage, the unfortunate stalemate over Brexit rumbles on here at home. Theresa May has returned from the Easter break to rumours of another attempt by Brexiteers to oust her from office, while Brexit negotiations with Labour continue.
Source: FE Analytics, data sterling total return (%) to 19 April
Easter doves here to stay?
For investors across Europe, the return from the long weekend has been met by a spike in the oil price on confirmation from Donald Trump that the US will apply full sanctions on Iranian oil starting from 2 May. That may be triggering some inflation worries.
The US will argue that Saudi Arabia and other Gulf states can easily make up the supply imbalance and oil prices should not trend that much higher. Yesterday the price of Brent crude oil moved up about 3% to top $74 a barrel, with many commentators anticipating no extra supply from Saudi entering the market until the price touches $80. If this proves to be the case investors may worry about the move in oil prices and start to anticipate a rethink by the US Federal Reserve (Fed) on its dovish policy.
Early last week, Chicago Fed President Charles Evans commented that the Fed should tolerate inflation above 2%, half of the time, which suggests worries about the Fed abandoning its dovishness may be unfounded. Yields on 10-year US Treasuries have been moving higher recently, and are now not far from the levels they were at before the Fed shifted to a more accommodative approach in March.
Economic growth has slowed noticeably and continues to decelerate. We expected this slowdown, as much of the faster expansion of 2017/2018 was driven by sugar-rush US tax cuts. For now, we see GDP growth moderating, but ticking along in reasonably good health for the rest of the year. While the chances of a recession have risen, we believe it will be many months – possibly a year or longer – before a downturn arrives.
Economic data are mostly solid, particularly in the US and China. A truce in the Sino-American trade war would add support to equity markets, too. But unlike the unusually good UK weather over the Easter weekend, it’s not likely to be clear blue skies ahead for global trade, with President Trump now setting his sights on Europe and Japan as the next targets in the tit-for-tat tariff wars.
UK 10-Year yield @ 1.23%
US 10-Year yield @ 2.59%
Germany 10-Year yield @ 0.05%
Italy 10-Year yield @ 2.68%
Spain 10-Year yield @ 1.11%
Economic data and companies reporting for week commencing 23 April
Tuesday 23 April
US: New home sales (March)
Wednesday 24 April
EU: German Ifo business survey; France manufacturing and business confidence surveys (April); ECB economic bulletin
Company results: Associated British Foods PLC, Petropavlovsk PLC
Thursday 25 April
US: Durable goods orders (March); weekly jobless claims
Company results: Ferrexpo PLC; Barclays PLC
Friday 26 April
UK: Fitch reviews UK debt rating
US: Q1 GDP flash estimate; University of Michigan consumer sentiment survey (April)
EU: French INSEE consumer confidence survey (April)