New article from Tatton Investment Management: ...'Twere well it were done quickly

22 July 2019

It has been another reasonable week for risk assets, especially equities. At the time of writing, markets around the world are within a percentage point of last week’s highs. In the US, large cap stocks are floating just off the all-time highs. Meanwhile, the global economy continues to look lethargic, and political headwinds aren’t making things any easier. In the US, the quarterly earnings season is expected to reveal the first corporate earnings recession since 2016, and Europe’s company statements indicate a similar picture. Around the world, trade wars, Brexit and other issues threaten growth.

Investors are choosing to look past this and focus on the positives. Monetary policy looks set to get more accommodative and many expect the soft patch for global growth to be ending. Despite the current troubles, a rebound in corporate earnings is expected before the end of the year.

Donald Trump’s trade wars have been close to the top of investor concerns for over two years now. Anticipation of a trade armistice between the US and China has pushed market sentiment up and down in that time. But the markets’ current good feeling has little to do with trade talks. Negotiations between the world’s two largest economies are stuck in the slow lane. While US Trade Secretary Steve Mnuchin made some positive comments about establishing face-to-face meetings, other noises from the US administration show an underlying mistrust between the two sides. Donald Trump has even gone as far as declaring that American tech giants Facebook and Google are China’s stooges for their attempts to grow businesses there. Underlying the rhetoric is the constant implication that China is an enemy.

Currently, any kind of agreement that ends the tariffs already imposed looks far off. And given the US presidential election cycle is already in full swing – with Trump looking for ways to show strength – things could well get worse before they get better. The trade war is proving to be one of attrition. The damage to this is already doing to global activity is clear enough, but the added pressure it puts on an already weak Chinese economy doesn’t bode well. Moreover, Trump’s strategy of using tariffs to reframe trade seems to be setting a global precedent that could well outlive his tenure. As we can see in the recent spat between Korea and Japan, there are signs that the weaponization of trade is becoming a fixture of global politics.

Fortunately for markets, while trade conditions may be getting harder, financial conditions have eased and look set to get easier. The US Federal Reserve has shown a clear bias towards dovishness, with Chairman Jerome Powell and those close to him on the policy team pushing for interest rate cuts. On Thursday evening John Williams (President of the New York Fed and noted expert on monetary policy in a crisis) was thought to suggest that the central bank could be even more aggressive than anticipated in slashing rates. His comments were later clarified by the New York Fed, but they led many to believe that the Fed’s imminent rate decision (on July 31st) could be 0.5% rather than 0.25%. Implied market expectations are now split 50/50 on how large the cut will be. Not only that, but markets now also expect the ECB and possibly even the BoJ to follow suit in loosening monetary policy within days of the Fed decision – and allowing more cuts from other central banks, especially in emerging markets.

 

News Archive

19 August 2019

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22 July 2019

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3 June 2019

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3 June 2019

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3 June 2019

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27 May 2019

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20 May 2019

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13 May 2019

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7 May 2019

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16 April 2019

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8 April 2019

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1 April 2019

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25 March 2019

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18 March 2019

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11 March 2019

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4 March 2019

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25 February 2019

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18 February 2019

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15 November 2018

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15 October 2018

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1 October 2018

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27 September 2018

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7 September 2018

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31 August 2018

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24 August 2018

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17 August 2018

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10 August 2018

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3 August 2018

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27 July 2018

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20 July 2018

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13 July 2018

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27 June 2018

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8 June 2018

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1 June 2018

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18 May 2018

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11 May 2018

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4 May 2018

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27 April 2018

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20 April 2018

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6 April 2018

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6 April 2018

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29 March 2018

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23 March 2018

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16 March 2018

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2 March 2018

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23 February 2018

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16 February 2018

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9 February 2018

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2 February 2018

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26 January 2018

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19 January 2018

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12 January 2018

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5 January 2018

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15 December 2017

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8 December 2017

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5 December 2017

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1 December 2017

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24 November 2017

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17 November 2017

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3 November 2017

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1 September 2017

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