The retaliation by the Chinese to Donald Trump imposing the tariff hikes rattled equity markets on Monday. Major US indexes losing over 2% in the days trading. We expressed the view that a correction of circa 6%, taking the S&P 500 back to 2800 was probably in order after the sharp rise from the start of the year. The fall on Monday took us back to that level. The S&P 500 is only now marginally higher than where it was a year ago. Higher tariffs can have the dual effect of pushing up prices and lowering growth, not a helpful combination for any economy.
The correction was probably overdue as the market had become overly complacent that the US and China would come smoothly to a mutual agreement. The next date top watch, according to Pantheon Research, will be the meeting of the G20 on June 28th. It remains in both countries best interests to find an amicable solution prior to that date. Trump rather confirmed this view commenting that “ they will see in the next three to four weeks if talks are successful” and in his view they will be “very successful”. Whilst both sides remain at the negotiating table equity markets may start to take a more positive view of the eventual outcome.
The recent volatility has resulted in outflows of from US equity ETF’s to the tune of around 2.5 billion dollars. The last couple of times the outflows had reached such proportions, in the past year, equity markets recovered their poise in the coming weeks.
One event that UK equity investors seemed to take in their stride was the announcement from Vodafone that it was cutting its dividend. The share price performance to this news was fairly muted, as the equity market had probably come to the conclusion it was becoming a possibility. There are several other companies in the FTSE 100 with large dividend yields, investors may start to worry Vodafone may not be the only company forced to revalue its dividend policy.
One further minor point of note, the price of Bitcoin has been on the rise recently, back over 7000 dollars. The Bitcoin had started to become something of a monitor for risk appetite.The recent price rise may suggest some investors may start to see it as a safe haven during volatile times. As Gold is the Worlds teddy bear, Bitcoin the worlds comfort blanket? We shall see.