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One of those months?

by Chris Bailey, European Strategist, Raymond James Investment Services

‘Fashion is a form of ugliness so intolerable that we have to alter it every six months’ – Oscar Wilde

With ‘fast fashion’ being so prevalent in today’s world, perhaps we should not be surprised that Oscar Wilde’s dictum looks a little slow as the world only racked up four successively positive months before a reversal.  May 2019 will not go down in the financial market almanacs as anything other than a shabby month, with the regional pan-European share index falling around 5% and more than reversing any gains seen earlier in the quarter. Broadly speaking, this performance pattern in May – supplemented by the compression of sovereign bond yields – was repeated all over the world.  

The major catalyst was a sharp deterioration in the bilateral trade relations between the United States and China, an outcome made worse by the apparent proximity of a deal between the two countries in the weeks before which had financial markets buoyed markets year-to-date.  It is not even clear today what the precise sequence of events behind the breakdown of discussions were with both sides – unsurprisingly – blaming the other. However the inflaming of tensions which has manifested itself in new tariff impositions by both the American and the Chinese administrations on each other’s exports, induced a clear divide in sector performances between defensive and trade-sensitive sectors.  In most markets areas such as the Materials sector led the way down, while the Health Care and Utilities sectors outperformed.

Any student of world trade trends over time knows that the ‘tit for tat’ retaliatory trade tariff measures apparent during much of the 1930s both deepened and prolonged economic challenges at that time. Certainly such insights from economic history remain applicable to today’s global economy and may well actually occur more quickly and more powerfully due to higher levels of trade, interdependence and integrated supply chains.  It is not unreasonable to conclude that the direction in the tone of global trade discussions will correlate with the broad movement of financial markets.

Naturally both political leaders and trade negotiators are well aware of all this, a point reiterated by a need for President Trump to avoid an overt economic slowdown to maximise his chance of getting re-elected in November 2020.  Meanwhile in China, slower economic growth rates can be offset by more stimulus efforts and this has been apparent over the past few months. However such a focus threatens progress with the country’s all-critical domestic reform and change programme which is attempting to improve the efficiency, dynamism and longer-term growth potential of the Chinese economy.  The incentives to ultimately strike a trade deal sufficient – at least – to keep bilateral relations on an even keel for the next year or so are still apparent. As always though in diplomatic poker, when playing for high stakes in the area of world trade cool heads from policymakers are essential otherwise further financial market volatility is likely. All eyes are on the likely next opportunity for face-to-face talks for both sides at the G20 conference in Osaka, Japan in late June.  

May was also a month of political change and events across Europe, however neither the European Parliamentary election results nor the effective kicking-off of the race to be the next UK Prime Minister were wholly unexpected.  Such debates will have their own specific influence on regional and global markets in due course later in the year but – at least from the perspective of financial markets over the next few weeks – it is all about those bilateral US-China trade relations in terms of setting the tone. Here is hoping that recent market fashions do not become a discernible trend.


DISCLAIMER: The information contained in this article is for general consideration only and any opinion or forecast reflects the judgment of the Research Department of Raymond James & Associates, Inc. as at the date of issue and is subject to change without notice. Past performance is not a reliable indicator of future results.

You should not take, or refrain from taking, action based on its content and no part of this article should be relied upon or construed as any form of advice or personal recommendation. The research and analysis in this article have been procured, and may have been acted upon, by Raymond James and connected companies for their own purposes, and the results are being made available to you on this understanding.

Neither Raymond James nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such research and analysis. If you are unsure or need clarity upon any of the information covered in this article, please contact your wealth manager.