Financial markets in 2018 were notoriously characterised by threats of trade wars which had a significant impact on the performance of the equity markets.
After making significant progress on that front, markets reacted very positively, helped by a dovish fed and positive earnings reports from companies, propelling equity indices to new highs in 2019.
Unfortunately though, President Trump is back at it again, with his tweets vowing to ramp up tariffs on Chinese goods sending equity markets into a downward spiral once again. These moves are expected to be further exacerbated by investors taking profits on their handsome gains, further increasing downward pressure in the short term.
In terms of portfolio positioning, the question beckons whether to take chips of the table at this point in the year. A factor to consider is that over the summer period trading activity tends to be lighter, potentially deepening any price drawdowns.
Markets seem uncertain whether or not to call Trump’s bluff on further escalations with China, with the US benchmark initially tumbling as much as 2.4 per cent before clawing back some of the losses to close the day 1.7 per cent down on Tuesday. Asian stocks bore the brunt of Trump’s aggression, with Chinese stocks touching their lowest level in two months on Monday.
As the situation currently stands, senior US officials said that levies on $200bn of Chinese goods would increase from 10 per cent to 25 per cent on Friday if a deal is not reached. They also accused Chinese negotiators of failing to honour commitments made in previous discussions. Given the current strength of the US economy and stock market performance in 2019, Trump knows he has some elbow room as he prepares to meet the Chinese negotiators.
As a result of the news, the VIX volatility index has sprung back to life, increasing to around 19% from the 12-15% range it has been trading all year. An addition to an investor’s portfolio of an exchange traded funded which tracks this index could be a useful short term hedge against any further escalations.
A concern reverberating around economist’s channels is the potentially short lived economic growth improvement in the US. Despite the US economy expanding at an annualised pace of 3.2 per cent in the first quarter, much of the growth appears to be temporary. Rising inventories accounted for 20 per cent of US growth and imports fell because traders had previously bought foreign goods in anticipation of tariff increases; a repeat of which is unlikely.
The US PMI survey, an indicator of manufacturing confidence and activity fell to 52.8 last month after steadily declining from a recent high of 60.8 last August, which suggests that manufacturers feel that business environment has deteriorated.
President Trump has said he will not rest until the goods deficit between the US and China is narrowed. Given what we have witnessed during his presidency until now I wouldn’t discount his words too severely. As the risk-reward picture changes, I would be inclined to take more of a defensive stance until the situation stabilises.
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