U.S.-China trade tensions rattle markets again. Is this time different?
On a special podcast edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Research Analyst Brian Yadao discussed the escalating U.S.-China trade war, flash Purchasing Managers’ Index® (PMI) numbers for May and the potential for changes to monetary policy in Australia and the U.S.
Will China retaliate for U.S. ban against Huawei?
Global equity markets were shaky the week of the 20th of May, Eitelman noted, as trade tensions between the U.S. and China remained high. Although markets have been impacted by a slew of ups and downs in the trade dispute for the better part of a year, Eitelman said that this time feels a bit different. “Ever since the U.S. raised tariffs on $200 billion worth of Chinese goods on the10th of May, the news surrounding trade has continued to trend in a negative direction,” he observed. What’s more, the two countries aren’t talking to each other at the moment, Eitelman added. “This is highly significant,” he said, “because it drastically reduces the potential for a trade deal between the U.S. and China in the next few weeks — and makes it unlikely that there’ll be a resolution in time for the upcoming G20 summit in Japan in late June.”
In addition, the fact that the U.S. is now starting to target individual Chinese businesses only adds to the recent escalation in the trade conflict, Eitelman said. “The U.S. Commerce Department recently placed tech giant Huawei on its entity list — which is essentially a trade blacklist that restricts the sale of U.S. goods to specific companies,” he explained. Markets have really zeroed in on this, Eitelman said, because the ban could potentially damage Huawei’s ability to continue on as a business. China hasn’t fully retaliated in kind yet, but it’s possible the country may respond by either targeting a prominent U.S. business or restricting exports of rare earth minerals to the U.S., Eitelman said. “Doing this would be a further escalation and only add to the growing concern for markets,” he observed.
Ultimately, trade uncertainty is likely to be a lingering risk that markets will have to grapple with for the foreseeable future, Eitelman said. He believes that the conflict could also dampen the economic growth trajectory in the U.S. a little bit.
May flash PMI numbers indicate weakening business activity
Preliminary PMI data for the U.S., Japan and the eurozone was released the week of the 20th of May. Importantly, the surveys were conducted after the escalation in trade tensions between the U.S. and China, Eitelman said. So, what does the latest data suggest? “Overall, there’s been a weakening in business activity and new industrial orders, as well as some slippage in business confidence levels — the latter of which may stem from the impacts of heightened trade tensions,” he observed. In addition, the forward-looking expectations in the flash PMI numbers softened a bit during May — another signal of concern, Eitelman noted.
“That said, generally speaking, the flash PMI numbers from the U.S., Japan and the eurozone came in above 50 — indicating growth, rather than contraction — but growth has clearly weakened relative to April,” he concluded.
Australian rate cut appears likely after comments by RBA governor
Shifting to monetary policy, Eitelman noted that Reserve Bank of Australia (RBA) Governor Philip Lowe strongly hinted at an upcoming interest-rate cut during the 21st of May remarks in Brisbane. “He essentially said that the RBA will consider the case for lower interest rates at its June meeting,” Eitelman said, “and while that’s not a committing statement, that’s about as far as a central banker will go ahead of a meeting.” Lowe’s forceful language was a bit of a surprise to markets, he noted.
Turning to the U.S., Eitelman said that the release of the U.S. Federal Reserve (the Fed)’s minutes from its 30th April - 1st May meeting show that the central bank is fully committed to remaining in a patient policy stance for the time being. “The Fed doesn’t see a case for a rate cut or a rate increase right now,” he stated.
The bond market, however, has moved in a rather pessimistic direction lately, buoyed by a strong belief that the Fed will cut rates later this year. “At Russell Investments, our view is that this pricing is overly pessimistic, because we don’t see the fundamentals as being supportive of a rate cut,” Eitelman concluded.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.
The information on this website is only intended for use by professional clients, regulated financial advisers and intermediaries who are knowledgeable and experienced in the financial services market and in investment products of this nature. If you are a retail or individual investor then please leave this website immediately and consult your financial adviser.
You should not use this website unless you understand its nature and the extent of your exposure to risk. You should also be satisfied that the website and investments are suitable for your client in light of their circumstances and financial position.
The information contained on this website is for information purposes only and you should not take it as constituting an offer, solicitation, inducement, commitment or invitation to subscribe for or to purchase, sell or hold any interest in any of the investments mentioned herein.
This website is not intended for distribution or use by anyone in any jurisdiction in which such distribution or use would be prohibited. Nothing on this website or in the materials referred to therein constitutes, or is intended to constitute, financial, tax, legal or other advice.
The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested. Any past performance figures are not necessarily a guide to future performance.
The website may contain forward-looking statements, which are based on a number of assumptions regarding present and future business strategies, which may or may not prove to be correct. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance.
Issued by Russell Investments Limited. Company No. 02086230 and Russell Investments Implementation Services Limited Company No. 3049880. Registered in England and Wales with registered office at: Rex House, 10 Regent Street, London SW1Y 4PE. Telephone +44 (0)20 7024 6000. Authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London E20 1JN.
All reasonable care has been taken by us to ensure that the information contained on this website is accurate at the time of publication. However, we accept no responsibility for the accuracy, adequacy or completeness of the information and materials contained on this website and expressly disclaim liability for errors or omissions in such information and materials. We and our respective affiliates do not have any obligation to update the information contained in this website and reserve the right to change these terms and conditions at any time, without notice.
We will not regard you or any person who accesses this website as our client in relation to any of the investment products or services detailed therein, unless expressly agreed.