Weekly View – From trade wars to tech wars

The CIO office’s view of the week ahead.

The arrest of Huawei CFO Meng Wanzhou by Canadian officials on a US extradition order brings a new layer of complication to the ongoing US-China trade dispute. Chinese telecoms giant Huawei Technologies has ambitions to be a global leader in the next generation of 5G wireless network technology, which has equipment vendors around the world in a race to secure early dominance. Timing was particularly notable as the US and Chinese presidents Donald Trump and Xi Jinping had just celebrated a “highly successful meeting” on trade relations alongside the G20 summit in Buenos Aires just days before. This new development underscores our view that the current US-China conflict is about more than just trade and that issues outside of trade will continue to weigh on future discussions between the world’s two largest economies.

Meanwhile, as the oil price continued to nose-dive, the Opec+ summit delivered an agreed production cut of 1.2 million barrels per day, more than what the market expected but still 100,000 barrels per day shy of the level likely necessary to rebalance the oil market. While the announcement put a floor on crude oil prices, we are sceptical about the medium-term outlook. Quota compliance has always been tricky to enforce and prices are likely to remain volatile as we go into the Northern winter. We still expect oil prices to converge toward the long-term fundamental equilibrium of USD 70.

Oil prices play a critical role in the US economic outlook. The US is now the world’s largest oil producer and the oil price is the main driver of inflation expectations, with low inflation expectations being the key drag on long-term interest rates. The US yield curve has shifted down and flattened, with inversion seen last week between two- and five-year Treasuries’ yields. With our expectation for the 10-year yield to rise to 3.4% by the end of 2019, we remain broadly neutral across the US Treasury curve, albeit with an overweight bias toward the short-end (up to five years) relative to longer, less attractive maturities. Thus, we recently added three-to-five-year bonds.

César Pérez Ruiz, Head of Investments & CIO

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