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.

 

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Past performance is not a reliable indicator of future performance. GINN XYY9MQ.00000.SP.03. CSTT-014820-2019