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Nobel Peace Prize and GDP data

27 April 2018

Could Korean peace talks put Trump in line for a Nobel Peace Prize and what impact does this have for investors?

Two days ago the Washington Examiner suggested that President Trump deserved a Nobel Peace Prize.  Barack Obama was awarded the peace prize just one year into his term in office and during the 2016 presidential campaign suggested that North Korea would be the new president's toughest challenge. Over the past year, President Trump has taken a very tough line on North Korea and his rhetoric, calling Kim Jong-Un "little rocket man" and threatening "fire and fury",- appeared far from conciliatory.  Yet today, we see the North and South Korean leaders meeting face to face and announcing that they aim to have a peace treaty by year-end. Further still, they announced that they are looking to make progress towards the denuclearisation of the Korean peninsula.  The talks follow the North Korean leader's visit to China, perhaps suggesting that Chinese influence may have played a big part in bringing the North to the table.  China has the strongest hand to play in that they control fuel supplies to the North. However, without Trump upping the pressure on China to act it could be argued that this would not have happened.  The talks today are undoubtedly good news for world peace but the devil will be in the detail and some months of negotiations lie ahead. However, as our greatest wartime leader Winston Churchill said "Meeting Jaw to Jaw is better than War".

As has been discussed previously, a war in the Korean peninsula would have a devastating impact.  However, the Korean stock market, that one would expect to suffer most, returned over 20% last year despite the raised tensions. This may reflect a lack of concern by those closest to the situation or that they had just become immune from the tensions. I would not expect this to have much market impact on its own.  The question we may have to ask is if Trump's extreme rhetoric and blustering style, however much we dislike it, may get results in the end.  In this respect his trade sanctions directed at China may also be leading to concessions with the reduction of tariffs on Chinese car imports announced this week.

Trump is unpredictable and takes extreme positions but his posturing may in the end lead to positive results, however unlikely it appears at the time. Trade tariffs were taken harshly by markets but if he wins concessions, the outcome may be positive for markets.

 

Could a blanket of snow have caused the hearts of central bankers to soften?

The advance release of UK first quarter GDP data came in far weaker than had been expected at 0.1% quarter on quarter. This compares to 0.4% in the previous quarter.  Last week inflation data also came lower than expected. Following on from that, the governor of the Bank of England, Mark Carney, suggested that the next rate rise in May was not a certainty.  A month ago the probability of the Bank of England raising interest rates in May, as indicated by the futures market, was at 95% but today it is less than 25%.  Only six weeks ago the country was under a blanket of snow that brought much of the country to a halt.  People could not get to work and major services were unable to proceed as normal.  Weather impacts are hard for economists to measure and the present weakness here and in Europe is at least partially weather related but may be signs of a faltering in economic growth.  While the European Central Bank rate decision yesterday indicated little expected change, the tone in Mario Draghi's press conference was more cautious.  The governing council had focussed more on the trajectory of recent data, which has been weaker, rather than monetary policy.

As has often been the case in the past, weaker economic data has lowered bond yields but boosted equity prices. Following the UK GDP number ten year gilt yield fell 0.05% and the FTSE 100 moved up 0.3%.  The benchmark stock index with its high proportion of foreign earnings has also gained some support from a weaker pound as a May interest rate rise gets priced out of the market. 

Weather affected economic data appears to be denting confidence at central banks on both sides of the channel.  Until we see a clearer indication of the economic direction they are likely to err on the side of caution and defer any moves to tighten monetary conditions. As a result the May rate rise we expected is now more likely to be put off into the second half of the year.

 

 

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