Market round-up: 27 – 31 May 2019
Arjun Pandya | May 31, 2019
The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding in May 2019.
The week that was…
In a week that saw economists become more like geologists, a burgeoning trade war between the US and China rocked global markets once more.
Wednesday saw China’s Communist Party newspaper warn that Beijing was ready to use its dominance in rare earths to strike back against possible US tariffs, in what has become an increasingly bitter trade dispute. For those who are not experts regarding the earth’s crust, rare earths are the 17 minerals with both magnetic and conductive properties which help to power electronic devices such as smartphones and tablets. Interestingly, they are anything but ‘rare’; rare earths are actually pretty ubiquitous but are extremely difficult to mine safely. About one-third of the world’s rare earth minerals are found in China but the country controls 90% of production and accounts for 80% of their exports into the US.
The news that China would now use its dominance in the area as a form of retaliation hit UK markets, with the mining heavy FTSE 100 falling over 1% on Wednesday. German 10-year government bond yields fell deeper into negative territory, inching down to record lows of -0.21%, with equivalent US Treasury yields hitting 20-month low of 2.17% as investors fled to perceived safe-haven assets.
Negative investor sentiment over rare earth tariffs was not aided by lacklustre US data showing that manufacturing growth dropped to 10-year lows, with another round of trade tariffs increasing the chances of a recession in the world’s largest economy.
President Trump’s appetite for tariffs was not fully quenched until Friday as he turned his attention to Mexico, slating their attempts to stem the flow of illegal immigrants across the southern border. In a much bolder statement than anticipated, Donald Trump now vowed to slap tariffs on all goods coming into the US from Mexico, starting at 5% and subsequently ratcheting up much higher until the flow of people decreases. The Mexican peso as well as bourses in Europe and Asia fell on the news. Shares in Japanese automakers, who ship cars from Mexico to the US, were hardest hit.
The spectre of a no deal Brexit also did its fair share of damage to domestic markets as the pound slid below $1.26 on Friday on the news that a 12th candidate had joined the race to be the next Prime Minister. With former Tory leader Iain Duncan-Smith warning of chaos with the number of candidates running, few commentators are expecting a cut and dry leadership contest. The mood around Westminster was already one of discontent, as Nigel Farage’s Brexit Party claimed 31.6% of the weekend’s European elections, crushing the mainstream parties who are so at odds with each other. The Conservatives mustered less than 10% of the votes.
The week ahead…
With trade wars now firmly back on the agenda, market commentators will be hoping that there will be a shift back to economic fundamentals as we enter the summer months. As those keen on astrology will tell you, the beginning of June comes under the Gemini sign of the zodiac, famously represented by twins. With global markets having struggled last week as Donald Trump attempts to battle on twin fronts, analysts will keep an eye out for fresh tariffs placed on either Chinese or Mexican goods.
However, it will be Europe where our focus will fall on first as a raft of Manufacturing PMI data is released for the bloc’s largest economies. Germany, France and the UK will all release details of how their respective manufacturing sectors are performing on Monday. Domestic manufacturing will unsurprisingly be of the most interest to investors on these shores, especially as Brexit negotiations continue. In what will be the final week for Theresa May as Prime Minister, it will be a relatively quiet one in terms of economic data releases as the race to be her successor should drive markets.
The first Friday of the month signals the release of US Non-Farm Payroll data, a key piece of information when determining the US central bank’s next rate move. With many now expecting the US Federal Reserve to next cut rates rather than raise them, poor employment data could help to reaffirm such suspicions.