Political and Market Volatility

Global equity markets fell further on Friday and Monday before rallying over the past couple of days to end some 1.5% lower since last Thursday.


Gold and government bonds rallied last week as expectations of further US interest rate cuts has risen. Interest rate probabilities point to a near certainty that the US Federal Reserve (Fed) will cut rates in September and there is some 30% chance that the cut will be 50 basis points – so half-a-percent – according to the market.

The three month moving average of job gains in the US has fallen so the economy is slowing whilst there has been no pick-up in investment spending from Trump’s tax cuts. Therefore, there is some economic justification for the rate cuts. However, most investors believe the escalation in the trade war is the main reason the Fed will cut interest-rates.

China a ‘currency manipulator’

Since last Friday, Trump branded China a ‘currency manipulator’ after the USD/CNY FX rate rose through 7, a psychologically important level. This sparked talk of currency devaluation but contrary to this, by-and-large China has been fixing its exchange rate at a stronger rate than expected. However, today is very different from 2015/2016 when markets were last fearful of a Chinese devaluation. There is no obvious froth in Chinese asset prices and any weakening in the currency will be viewed as a response to the trade war not a weakening Chinese economy. Still on trade – concerns over a brewing Japanese-South Korean trade war, two bastions of free trade and two of the largest exporting nations in the world, were allayed slightly after Japan granted South Korea an export license. This comes a month after Japan took aim at the South Korean economy by tightening controls on exports of three chemicals essential for making semiconductors that go into the smartphones and tablets made in Korea. In response, Korean consumers had started to boycott ‘made in Japan’ goods.

Sterling found some respite

Elsewhere, sterling found some respite after falling heavily since Boris Johnston’s election due to the higher fear of a no-deal Brexit. The logic behind this fear is that a ‘no-Brexit’ scenario would be an existential crisis for Boris and the Tory party, so a worse outcome for them than a ‘no-deal’. There has been speculation that an early November election is on the cards – allowing Boris to deselect Remainer Tory MPs and promote a tranche of pro-Leave conservatives.

Italian stocks and bonds

In Italy, the coalition government of the League and the 5* Movement (two populist parties) appears to be on its death bed. The 5* voted against a motion brought forward by the League, prompting its leader, Matteo Salvini, to call for a vote of confidence in the government and new elections. This has hit Italian stocks and bonds.


Also of note is:

  • In 2018, US companies retuned more cash to shareholders than they generated in free cash flow;
  • Trump has stepped up his attacks on Google (part of a Big tech meets Big regulation theme);
  • The Japanese economy grew ahead of expectations in Q2, up 1.8% versus the market’s expectation of up 0.6%.

© 2019 GWM