Market Commentary 3rd June 2019 from Charlie Hancock

Investors are reacting to reports which suggest that the US and China are drifting further apart on some of the issues which are key to reaching a resolution to the ongoing trade war. In addition, President Trump announcing that the US will impose significant tariffs on Mexico’s exports to the US added to concerns regarding the economic impact of global trade disputes.

Data showing that production volume in the tobacco industry continues to shrink sent British American Tobacco’s share price down by 7.5% across the week, with rival Imperial Brands declining by around 6.5%. Tesco’s share price fell by 2.6% across the week, owing to a report showing that the largest 4 supermarkets in the UK are continuing to lose market share to discounters such as Aldi and Lidl.

The auto-maker sector in Europe has suffered weakness since the US-China trade dispute started. This week’s announcement from President Trump regarding tariffs on Mexican imports added to concerns that the auto sector will struggle as a result of slowing global economic growth. BMW’s share price declined by 2.3% across the week, with Volkswagen Group falling by 2.4%.

US stocks had a rough start to the week, owing to tit-for-tat announcements from Beijing and Washington. President Trump’s twitter announcement on Thursday evening regarding tariffs on Mexican imports caused a further decline on Friday. Trump explained that the US will impose a 5% tariff from this month, which will rise gradually to 25% until Mexico stops illegal immigration across the southern border.

The US and Mexico have a close trading relationship, with many US companies relying on imports from Mexico. At a time when US business investment activity is already contracting, higher costs for US companies as a result of the proposed tariffs could harm the domestic economy. The sell-off in equities which took place late last week reflects concerns that these tariffs will dampen US economic growth.

China’s Shanghai Composite Index rose by 1.6% across the week. Data was released which showed manufacturing activity in China slowed during May as a result of weak export orders, however, other surveys conducted last month showed that domestic economic activity remains strong, with the construction industry in particular gathering pace.

Japan’s Nikkei 225 index declined by around 2.4%. The Japanese Yen is viewed as a safe haven asset, which tends to appreciate in value when sell-offs in equity markets take place, as a result of investors allocating increased amounts to the currency. This has a negative impact on the export heavy Nikkei 225 index. In addition to the impact of a stronger currency, the index suffered as a result of share price declines for Toyota, Honda and Mazda, who all have factories in Mexico.

Data published this week showed that inflation in Germany slowed more than expected in May, down to an annualised rate of 1.3% from 2.1% in the previous month. This, together with increased capital flows into government debt as a result of investors allocating capital away from equities, pushed Bund yields lower.

This latest decline now means that bond markets are pricing in expectations of a 0.25% interest rate cut by the Federal Reserve this year, with rate cuts of 0.50% expected during 2020.

GBP / EUR – Current 1.1308 Previous 1.1347

Sterling remained at a low point this week, owing to uncertainty regarding the Conservative party’s leadership contest and the UK’s future relationship with the EU. Analysts expect the pound to trade close to its current level until there is some clarity regarding Brexit.