Weekly View – Tariff train takes off

The CIO's view of the week ahead.

Last week was so full of market-moving news that ordinarily major events took the backseat. Critically, trade tensions escalated rapidly from Friday, with China announcing tariff retaliations of the order of between 5% and 10% on USD 75bn of US imports from September. Trump took to Twitter in turn, raising both current and planned tariffs to 30% on USD 250bn and 15% on USD 300bn worth of Chinese imports. This puts an already fragile global economy in greater peril, with markets correcting sharply as a result, before rallying again on Monday. Although we do not see a market collapse on the imminent horizon, we are happy with our underweight in equities and neutral position in US bonds as a recession hedge.

At the same time, while the central bankers of the world were assembled at Jackson Hole, Trump upped the pressure on Fed Chairman Powell for more dramatic rate cuts. The US president also suggested that he was exploring a range of new tax cut options, including cuts to capital gains and payroll taxes. However, he also stipulated that that because the US economy is in such a “strong economic position”, no tax cut proposal is imminent.

Signs of stabilisation peeked through in Europe, but the overall position of the single market economy remains precarious. PMI surveys highlighted Germany’s continued manufacturing sector weakness is beginning to spill over into its services sector, against a slight uptick in the broader euro area’s composite PMI. Meanwhile, stubbornly low inflation in the single currency area will bolster market expectations of additional stimulus from the European Central Bank in addition to the possibility of fiscal spending in Germany. Boris Johnson embarked on his first European tour as UK prime minister to a mixed reception. Germany’s Angela Merkel took an optimistic tone about reaching a Brexit agreement, while Emmanuel Macron played hard cop on the Irish backstop. In the continent’s sunnier climes, new elections in Italy in the wake of the prime minister’s resignation might be avoided, which would reduce the risks of a hard-right populist government taking the helm, although we still see the 2020 budget talks as the biggest risk to Italian government bonds.

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

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