Weekly View – Powell throws in the towel

The CIO Office's view of the week ahead.

After a brief lull, Trump renewed escalating trade tensions with China by threatening new tariffs on USD 300bn of Chinese imports to the US. A global sell-off ensued and the Chinese authorities now appear less inclined to resist renminbi weakness relative to the dollar, having allowed the renminbi to break the CNY7/USD “psychological threshold”. Unsurprisingly, exporter-heavy indices were hit particularly hard in equities, as investors fled to safety, adding further pressure to the US 10-year Treasury yield. At the same time, Japan put fresh trading restrictions on South Korea, adding fuel to the global trade war fire. Removing South Korea from its “white list” will in effect impose new trade restrictions on Japanese exports to South Korea, threatening to disrupt the tech supply chain, which the South Korean president has already threatened retaliation against. The storm clouds are certainly gathering on the outlook for global trade. We remain generally cautious on equities as tensions and uncertainty swell.

On Wednesday, the Federal Reserve bowed to market pressure, delivering its first rate cut in 10 years. Given that the average tenure of a fund manager is only eight, this is the first time many will have seen a Fed rate cut in their investment careers. Because of continued central bank support, we continue to prefer credits over equities. The pre-emptive nature of the Fed’s move should be positive for prolonging the business cycle but comes with the unintended consequence of giving Trump room to escalate his trade war with China, putting the cycle back in risk territory. The added uncertainty means we need investment and consumption to step in to support growth in H2.

Data out of Europe is trending weaker, so with Trump’s new tariffs, the positive impact of central bank easing is being overshadowed by antigrowth forces. Because the fresh tariffs will hit iPhones and iPads, the quality growth leaders that had been the main stocks moving higher might now suffer a direct setback. Last week’s silver lining came from slightly better reporting season news and the announcement of some M&A deals. For this, we like event-driven strategies in the hedge fund space.

 César Pérez Ruiz, Head of Investments & CIO, Pictet Wealth Management

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