Trump at gas mark 200 sends US equities into the red

Equity capital markets, particularly in Europe, are playing catch with the potential consequences of a trade war with the US. European equity markets have been taking the concerns harder than US markets are currently. Angela Merkle’s domestic problems, not helping sentiment. It is also possible that Wall Street had not the time to react to Monday’s news that Donald Trump has ordered officials to draft plans for another 200bn dollars’ worth of import tariffs on Chinese goods. This could be a high-risk game of chicken that Mr Trump is currently playing to bring China to the negotiating table, like any game of chicken failure can have severe consequences.

We said in the past, of all the bricks in the current wall of worry a trade war is the most likely to unsettle equity capital markets. Safe havens were in demand as US Treasury yields fell, along with German bunds. The yield on the German ten year, at 36 basis points, continues to suggest a high degree of the fear factor within the eurozone. It should also in a perverse way provide something of a floor for German equity prices as the risk premium for owning German equities has once again become even more attractive.  The incentive to sell German equities and buy German bunds is only there if you have an extremely bearish view of the European economy.

Other “risk off “assets in demand were the Japanese yen as it rallied against the US dollar, at the same time the dollar rose to an 11-month high against its basket of other currencies. One haven, gold, remains unloved as the price has fallen back below 1300 dollars an ounce.

Former US treasury secretary Larry Summers, speaking on Bloomberg tv, expressed the view that developed economies are not well prepared for a recession. Not sure economies are ever prepared, that is probably why they happen. In the current environment he believes that central bankers should rather see inflation overshoot target than tighten monetary policy and choke off economic growth. He goes on to make the point that when previous recessions occur central banks have plenty of room to cut interest rates, this is not currently the case, particularly for Europe. Probably part of the motivation behind the Fed to raise interest rates whilst the US economy can withstand it, giving theFed some firepower if the economy does look like it’s going to slow. Mario Draghi speaking at the ECB central banking forum on Tuesday, reiterated his comments of last week, accommodative policy needs to remain in place and will take a gradual step when hiking rates. 

Posted on June 19, 2018 .