Weekly View – markets live another day

The CIO office’s view of the week ahead.

Last week saw some welcome stabilisation in markets, even though the first wave of US tariffs against Chinese products kicked in on Friday, followed immediately by Chinese counter-measures for an equivalent amount. Instead, investors remained focused on the dollar. The recent strength of the greenback has contributed much to emerging markets’ (EM) weakness. But the dollar index weakened at the end of last week following the release of average US earnings data that disappointed expectations. Helped also by domestic factors, EM currencies and assets bounced back, including the Mexican peso and the Chinese renminbi (there, the central bank provided signs it was ready to defend the currency against capital outflows).

But the recovery in risk sentiment is fragile. Although it quickly recovered, Chinese smartphone maker Xiaomi initially slid as much as 6% on first day of trading in Hong Kong on Monday. Although not our core view, a US consumer price inflation report on Thursday that shows a big rise in core prices could turn heads in currency markets again. Importantly, the trade issue does not look like going away soon. Our best guess is that the wave of trade measures and countermeasures will stop once the Trump administration feels it has something it can ‘sell’ to the American electorate at the mid-term elections in November, after which the trade rhetoric may temporarily cool down. Alternatively and more ominously, Trump might feel that beating up the Chinese could pay dividends right through to the next presidential elections in 2020, even if they make some concessions.

Recent days provided some clarity on the UK government’s stance on Brexit and we’ve turned more positive on UK equities. A campaign to sideline the most ardent Brexiteers has begun, but a final, disruptive ‘purge’ of hardliners may be needed before the UK government presents a united stance. In the end, the possibility of a ‘soft’ Brexit could pave the way for a rebound in UK assets—but with a large dose of political uncertainty before then.

Cesar Perez Ruiz, Head of Investments & CIO

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