• While the fundamentals of the global economy remain strong, the
resurgent trade war is shaking markets. Equity pullbacks of around five per cent are normal occurrences
in an average bull market, but a large, unexpected change (perceived or actual) to the global trading
order would ensure the market correction goes well beyond that.
• We’re not there yet though.
The tariff moves announced so far will only have a small direct effect on growth and inflation in major
economies. Second-order dynamics via financial markets and confidence will be more significant and less
predictable. There is also the possibility of further escalation by the US or a more combustible
retaliation from China, either of which would further inflame tensions and elevate risks.
• Apart from the trade war, economic fundamentals are actually developing more positively than many
expected this year. China’s economy grew more than forecast in the first quarter, and forward-looking
indicators of European activity have steadily risen from their recent troughs. The US labour market
remains the envy of the world, with wages continuing to rise and the expansion set to continue at a solid
• Two other risks are worth watching. First, Brexit developments have deteriorated over
the last month and the odds of a general election have risen further. Second, we think the market is in
danger of misjudging the Fed. Next year, pricing looks fair given the balance of risks, but the bar for a
near-term cut is higher than many realise.
• Taking these views in aggregate, we continue to
structurally favour US equities and are more neutral on rates. However to get a trade deal we may need
some pain in equities first to focus minds. In currencies, we expect the Chinese yuan to depreciate as a
result of the renewed trade war.
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