13 Aug 2019
August Market Update
Chris Lioutas, PSK’s Chief Investment Officer
With the continued trade war tensions between the US and China and Trumps threats of an additional tariff on more Chinese goods the markets reacted with a significant fall last week. To provide context Chris Lioutas, PSK’s Chief Investment Officer shares his thoughts on these events and the broader issues currently shaping the investment markets.
Equity markets fell between 5-6% week commencing 5th August, as investors fretted over the lack of forward support by the US central bank (Fed) and an escalation in US-China trade war tensions.
The trade war escalation dominated headlines with the most recent negotiations going awry resulting in President Trump threatening 10% tariff on the remaining US$300bn of Chinese goods the US hasn’t already tariffed. The retaliation by China was swift with the Chinese “letting” their currency fall through a key level which is advantageous to Chinese exports. This resulted in President Trump labelling the Chinese currency manipulators and subsequently blaming the Fed for not cutting rates fast enough to put downward pressure on the US dollar (which is a form of currency manipulation in itself).
The Fed cut rates by 0.25% at their July meeting as expected. But the forward guidance they gave on the future path of rates was well below what the market was looking for in light of ongoing trade wars. This lack of Fed support ahead is what really drove equity markets lower over the last week or so.
Ongoing trade wars, and any escalation from here, is likely to result in a fall in consumer sentiment and confidence thus curbing consumption, and is likely to result in little to no business investment ahead which would lead to reduced output and weaker labour markets, all of which could culminate in a US and/or global recession happening sooner than many had expected.
As such, further central bank support (ie. lower rates and more money printing) will now be required to curb a trade war induced recession. In the last 7 days, we’ve seen 5 central banks ease policy, namely Hong Kong, New Zealand, and India, with increasing likelihood the RBA cuts rates at least one more time this year (possibly twice) and the backdrop that the Fed will now have to aggressively lower rates with another rate cut expected at their August meeting (and possibly a 0.50% cut at that). In addition, the European Central Bank is getting closer to taking their cash rate even further into negative territory as well as accelerating their money printing efforts.
Obviously a trade war resolution would make many of these issues go away. However, the trade war has become front and centre of President Trump’s re-election campaign. i.e. if he needs a resolution to get re-elected then we can expect one just before his campaign begins; however, if he’s likely to get re-elected with or without a trade war, then we might expect tariffs to become a rather permanent feature of his 2nd term in office. There is general support from both sides of US politics to not cede economic superiority to the Chinese, even though that is likely in the future.
The ultimate fix to the current situation would be a fiscal policy surge (ie. increased government expenditure and investment) globally so that central banks aren’t forced to undertake any further extraordinary policy. The likelihood of this happening in the near term is low given the political will just isn’t there whilst central banks remain active. What will it take to change that political will? We think the brink of a US / global recession would be enough to bring governments to the table, but hopefully they don’t leave it too late. Fiscal (government) and monetary (central bank) policy working in unison for the betterment of global growth seems to be wishful thinking for now.
As always if you have any questions or concerns, do not hesitate to contact one of our advisers here at PSK.