At the end of last year, markets fell sharply on fears that the US central bank was tightening too fast. This, combined with trade disputes, was feared would cause the global economy to slow. Since then, we have seen a sharp rally in equity markets as the Fed pulled back on its interest rate expectations and quantitative tightening. Fears of an escalation in the trade dispute between China and the US also eased, with signs a deal was getting closer. Last weekend, a tweet from Trump put a spanner in the works. He announced that tariffs would increase from 10% to 25% on $200 billion of goods on Friday as negotiations were progressing too slowly, with China attempting to renegotiate. This has escalated fears that Trump could walk away from trade talks as he has done from political talks with North Korea. Despite the tweet, China's delegation arrived in the US, but talks yesterday failed to reach an agreement and tariffs came into effect last night. China and the US are meeting again today and Trump maintains a deal is still possible
The initial reaction this week was sharpest in China, where the Shanghai Shenzhen CSI 300 fell 8%, 12% down from the April high. Global markets also fell, with the S&P 500 index falling over 3%. Friday however, saw China's market recover by 3% as hopes of a more positive outcome from the negotiations emerged. As talks continue and we get closer to a conclusion, markets will be watching for the slightest indication of how things are progressing.
If negotiations break down, China has said they will take retaliatory action. China's imports from the US are far less than US imports from China, so tariffs alone will be greater for the US. If the tit for tat approach to trade negotiations continues, China may take other actions such as revoking licences to US companies operating in China. Slowing global trade will have an adverse effect on the global economy, and in the end, will not be good for the US. If Trump wants to get re-elected in 2020, negotiating a deal should be a priority. Taking a tough stance may be playing politics for the domestic crowd or just a negotiating tactic. In the end, we expect a deal will be done even if talks are unsuccessful this week.
Taking a step back and looking at the big picture, after such a steep rise in equity markets, a correction may be a healthy move, however, painful in the short term. The US company results season has shown slower growth in revenues as expected, after high growth rates last year but sales growth averaging 5% growth is not bad. In the UK, the Brexit outcome and our political future is as muddled as ever but a 5% dividend yield should continue to support the FTSE 100 index.
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