Equity markets have lost their mojo, risk off is the name of the game at present, as a profit warning from Daimler did not help a rocky market sentiment. Daimler expects lower profits as they anticipate selling fewer cars into China, as the region retaliates to the Trump tariffs, making the whole Trump tariff war feel a little more real for the equity market. We used the phrase” game of chicken” to describe the actions of president Trump, and it does feel more as if this is the case, as he warns that if China retaliates further he will impose not 200bn dollars of tariffs but 400bn dollars. The European Union is joining the party as it will impose retaliatory tariffs against the US on Friday.
Assets that are in favour and rise when equities are out of favour, for example, are the yen, defensive stocks over cyclical ones, and the Vix index. They may have risen but so far have shown no real signs of panic. US treasuries are always in demand at times of caution, however, at present, the yield on the ten year remains close to 3%. The Russell 2000 index of smaller companies, which tends to feel the early brunt of growth concerns remains close to its all-time high. This may be a good sign as it could suggest that investors feel the current tensions will not develop into a major trade war and dent economic growth, or it could also signal we have more pain to go. We often need that panic to provide the base.
The FTSE 100 has taken a hit recently, despite sterling hitting an 11-month low against the US dollar. On Thursday sterling rallied as, possibly surprisingly a third member of the MPC, and a prominent one at that, chief economist Andy Haldane joined the ranks of those who think a rise in interest rates is appropriate. That takes the count to 3 out of 9, as he believes the UK economy is recovering from a slow start.
The probability that Hammond will follow through on Theresa May’s wish to pay for more NHS spending by raising taxes, in contrast to the party’s manifesto may also be having an impact on UK equity sentiment. In particular, the possibility to delay or cancel the promise to reduce corporation tax to 17%. This move to offer more money into the NHS does feel a rather cynical attempt by the current government to win popular support. We currently spend about 140 bn pounds a year on the NHS, why choose 20bn pounds as a number to further invest? Whether it will provide a noticeable difference is debatable, delaying tax cuts at a time when interest rates may rise may have a more tangible impact?