Turning the clocks back on trade

Weathering the markets last week wasn’t too dissimilar to weathering the roads: challenging, and not necessarily good for morale. Markets closed down on Friday; the FTSE 100 had fallen  -2.3% during the week and the S&P 500 -0.6%. February closed to the downside across major markets.

Weather-related ‘hysteria from Siberia’ dominated UK headlines, but the week was a busy one for politics across the major Western democracies. In Europe, Italy’s indecisive election was offset by clarity for Germany, as Chancellor Angela Merkel secured a coalition agreement with the Social Democrats (SDP). Theresa May made yet another ‘long-awaited’ Brexit speech, which didn’t clear up much of the uncertainty over the future of the UK in Europe. Meanwhile, US President Donald Trump added to the uncertainty around trade and the outlook for the global economy, setting markets spinning with proposed new trade tariffs.

Trump enthusiastically tweeted that “trade wars are good and easy to win”, but to students of British economic history it will feel like the clocks have been turned back 200 years to the disastrous Corn Laws of 1815. Though designed to protect domestic producers, they reduced disposable income, hampered growth, contributed to famine in Ireland and were ultimately repealed.

Unless the dismay expressed by trading partners, business leaders and his own party leads to a change of heart, President Trump looks set to sign an executive order placing tariffs of 25% and 10% respectively on imported steel and aluminium. He also announced a possible tariff on EU cars. The EU responded with proposed tariffs of its own, adding to concerns of a potential trade war brewing. While steel producers rallied, the rest of the market fell. Ten year Treasury yields rose 6 basis points to 2.87% on Friday on concern that higher materials prices could push inflation up.

  Index 1 week 3 months 6 months 1 year FTSE All-Share -2.2% -2.2% -2.9% 0.8% FTSE 100 -2.3% -2.3% -3.4% -0.4% FTSE 250 -2.1% -2.0% -1.1% 5.0% FTSE SmallCap -0.9% -1.0% 0.6% 9.0% S&P 500 -0.6% -0.1% 3.1% 2.2% Euro Stoxx -1.9% -2.2% -3.2% 9.8% Topix -0.5% -0.2% 4.8% 7.8% Shanghai SE 0.3% 0.1% -5.8% -2.5% FTSE Emerging Index -1.3% 5.8% 2.6% 13.0%  

Source: FE Analytics, data sterling total return to 2 March 2018

Looking for direction

The Italians went to the polls yesterday and voted for populism. The eurosceptic Five Star movement made sweeping gains, but not enough to declare victory. The likely outcome is a hung parliament, with the Italians potentially having to go back to the polls. 
Economic populism could push Italian bond yields higher, though the impact on the wider eurozone bond markets and the euro may be muted as a hung parliament was not unexpected. There could even be some good news for the Italian economy, given appetite among populists for fiscal reform.

The direction of US economic data still looks clearly up, though signals from the new Federal Reserve Chair Jay Powell were a bit mixed. His latest testimony to the Senate indicated that he sees no signs of the US economy overheating, with gradual rate rises on the cards. That was a more pared back commentary compared to his first-ever testimony to the US Congress earlier in the week, which left some wondering whether he might be more hawkish than his predecessor Janet Yellen. More clarity is likely following the Fed’s March meeting. Whether three or more hikes are on the cards, a potentially volatile year awaits as markets adjust to rising US interest rates. 

Jobless claims in the US are at a 49-year low. It was the 156th consecutive week that claims remained below the 300,000 threshold, indicative of a strong labour market. According to the latest ISM report, manufacturing is growing at its fastest pace since 2004. Global trade worries aside, everything points towards healthy GDP growth across the Atlantic.

Services PMIs this week are expected to support a positive outlook for the US and global economies, as should the global composite PMI out today. The ECB’s rate announcements are expected to start gradually turning more hawkish this year; a turn which could start on Thursday when they have their next rate announcement. 

Bonds

UK 10-Year yield @ 1.47%
US 10-Year yield @ 2.85%
Germany 10-Year yield @ 0.63%
Italy 10-Year yield @ 2.11%
Spain 10-Year yield @ 1.51%
 

Economic data and companies reporting for week commencing 5 March

Monday 5 March
Global: Composite PMI (Feb)
EU: UK: Retail sales (Jan), PMI services and composite
US: ISM non-manufacturing
Trading update: Wizz Air Holdings 
Preliminary Results: Ultra Electronics
Full-year results: Trinity Mirror, 

Tuesday 6 March
US: Factory orders 
Preliminary results: SDL
Full-year results: Silence Therapeutics, Rotork, PureCircle, Sirius Minerals

Wednesday 7 March
EU: Q4 final GDP; French Foreign trade (Feb)
China: Feb FX reserves
US: ADP employment (Feb); Fed Beige Book
Trading update: DS Smith
Preliminary results: Restaurant Group
Full-year results: Paddy Power Betfair, Rolls Royce Holdings, Stock Spirits Group, Tyman, WANdisco 
Interim results: St Ives

Thursday 8 March
China: Feb trade balance
Japan: 4Q GDP (second estimate)
EU: ECB meeting & press conference; German manufacturing orders (Jan) 
Preliminary results: TT Electronics 
Full-year results: Spirent Communications 

Friday 9 March
US: Non-farm payrolls (Feb); wholesale trade (Jan)
China: CPI (Feb)
UK: industrial production (Jan)
EU: German trade balance (Jan); Bank of Italy publishes “Money and Banks”
Preliminary results: SIG 

Julian Chillingworth
Chief Investment Officer