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10 May 2019

Trump Plays Tariff Card

At the end of last week, the US released their latest monthly employment data. The report indicated a robust job market with a rise of 263,000 new jobs during April, trumping the 190,000 forecast. Nevertheless, wage growth failed to accelerate, with the annual pace of wage growth coming in at 3.2%, raising the issue of whether this lack of inflation is only transitory. Overall, it was good news for markets as the US Federal Reserve (Fed) remains policy neutral on the back of the report, ruling out any immediate rate moves, leaving Treasury yields and the Dollar rangebound.

President Donald Trump decided to add some fuel to the fire at the beginning of the week, making a number of threats in relation to trade negotiations which are scheduled for the end of the week. Trump was tooting his own horn, stating the existing tariffs were “partially responsible for our great economic results” and had “little impact on production cost”.

He stated the current 10% tariffs on US$200bn of Chinese goods would increase to 25% on Friday, and that an additional untaxed US$325bn of Chinese goods would “shortly” be similarly taxed at 25%. This was a shock to the markets which had hoped a deal may be struck. However, given the modest scale of losses in the Eurozone and US share markets on Monday, perhaps investors believe Trump is all talk, and pursuing the 'art of the deal’, adding pressure literally hours before the final round of US-China trade negotiations. Given the recent job data and accommodative monetary policy from the Fed, it seems Mr Trump believes he has the upper hand in gaining better terms from Beijing.

A concluding tweet on Monday stated “The United States has been losing, for many years, 600 to 800 Billion Dollars a year on Trade. With China we lose 500 Billion Dollars. Sorry, we’re not going to be doing that anymore!” Despite Mr Trump’s confidence, the recent stabilisation in Chinese activity may make it easier for Beijing to walk away from aggressive terms. If trade talks cease this week, we could see this year’s equity gains be wiped out, highlighting how much of these gains are supported by the view that a China-US trade deal would be struck.

This week also sees Uber come to market, scheduled to price shares in its initial public offering on Thursday and begin trading on the New York Stock Exchange on Friday, potentially rivalling Facebook as the largest US technology market debut. Uber’s controversial past will be laid out for prospective shareholders, with details of legal and regulatory battles, together with its business plan and financial position. Uber are looking to raise up to US$10bn and was last privately valued at US$76bn.

In the UK, Brexit continues to dominate the market and headlines. Conservatives saw losses at local elections, suggesting the new Brexit party may make grounds in the European elections on 23rd May. Pressure is building on Theresa May to set a firm resignation date, particularly if the cross-party talks do not result in a withdrawal agreement by the end of June. Markets did not flinch when the Bank of England guided toward future interest rate hikes, despite Mark Carney warning investors they were underestimating the chances of higher borrowing cost when he presented forecasts for the economy last Thursday. It appears investors have become more cynical to central banks’ guidance and are impervious to anything beyond Brexit.

Elizabeth Pindar, Investment Executive
Trump Plays Tariff Card

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