August 07, 2019

August 07, 2019 | Adviser News

Equities stumble as US and China trade blows

Equity markets in both the US and Australia suffered their worst daily declines of the year this week as investors reacted to yet another escalation in trade war rhetoric between the US and China. Following on from weakness late last week, equity markets are now some 5% below record highs that were reached at the end of July.

The most recent spat of trade tensions kicked off with President Trump’s announcement last week that from 1st September, a further $US300bn of imports from China would attract a tariff of 10% (in addition to the $US250bn of Chinese imports that are already being taxed at 25%). Subsequently, China allowed the Chinese yuan to fall through a key support level of 7 yuan to the US dollar. This is seen as a psychologically important level by markets having not been breached in more than 10 years. President Trump then responded with accusations of currency manipulation by the Chinese. These developments raise the odds of a more protracted trade war and, with it, the threat of slower global economic growth.

Investor sentiment was already fragile following the US Federal Reserve’s 25bp cut in interest rates last week, the first cut since the GFC. Chairman Powell described the move as a ‘mid-cycle adjustment’, which dented market hopes of a full-blown easing cycle. Further weighing on investor sentiment has been subdued corporate earnings growth, though overall results so far in the US have not been as bad as initially feared.

Australia has not been immune from the turmoil, with our dollar falling to just 68 cents against the greenback as well as the sharp retreat in our stock market.

While these trade developments certainly merit monitoring, the market reaction so far is more akin to previous periodic setbacks. And while the retreat may become a ‘correction’ (technically defined as a pullback of more than 10%), few are suggesting that we are on the imminent cusp of something more sinister. However, this is a timely reminder to investors to consider the quality of the holdings in their portfolio. In particular, a more active approach may allow for a more comfortable journey through what may prove to be a more volatile period ahead.


Important information: The content of this publication are the opinions of the writer and is intended as general information only which does not take into account the personal investment objectives, financial situation or needs of any person. It is dated August 2019, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such. Past performance is not a reliable indicator of future performance and should be used as a general guide only. Neither Zurich Australia Limited ABN 92 000 010 195 AFSL 232510, nor Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511 of 5 Blue Street North Sydney NSW 2060, nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy nor accept any responsibility arising in any way including by reason of negligence for errors and omissions. Zurich recommends investors seek advice from appropriately qualified financial advisers. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant fund Product Disclosure Statement. No part of this document may be reproduced without prior written permission from Zurich.
Past performance is not a reliable indicator of future performance. GINN XYY9MQ.00000.SP.03. CSTT-014820-2019