Markets are running on hope

Commodities markets have been one of the most notable casualties of the deterioration in trans-Pacific relations, while stockmarket losses have so far been modest.

949_MW_P04_Markets

Powell the banker can he fix it?

There is still no end in sight to Donald Trump's "great patriotic wars", writes Michelle Cottle in The New York Times. The US president kept up the pressure on Beijing this week: during a state visit to Japan he warned that "we're not ready to make a deal" and that tariffs on hundreds of billions of dollars' worth of Chinese goods could "go up very, very substantially, very easily". As the economic toll of the dispute becomes more apparent, the Trump administration has taken to reminding Americans that "patriotism means sacrifice".

Nor is China in any mood to back down, note Andrew Batson and Chen Long for Gavekal Research. For his part, Chinese leader Xi Jinping has referred to a "new Long March", but the metaphor is "not a very encouraging one only a fraction of the soldiers who started the Long March survived".

So far, commodities markets have been one of the most notable casualties of the deterioration in trans-Pacific relations. Oil recorded its biggest weekly loss of the year, with West Texas Intermediate prices plunging 6% in a single day. Concern that global growth will slow has also hit copper prices. The industrial metal, a good proxy for the health of the world economy, has given back nearly all of its gains for 2019, after falling 9% from a high last month.

Central banks to the rescue?

Futures contracts reveal that investors believe there is a roughly 80% chance of at least one interest-rate cut by the end of the year. Yet minutes from the Federal Reserve's most recent policy meeting showed that the US central bank is content to remain on hold for the time being, writes Nick Timiraos in The Wall Street Journal. Remarks by Fed chairman Jerome Powell suggest it will take more bad news than markets expect to trigger policy easing, says Diane Swonk of Grant Thornton.

However, trade tensions may be prompting a broader reappraisal of the health of the economy, says John Authers on Bloomberg. With the ten-year US treasury yield hitting a 19-month low this week, traders are "back to worrying about stagnation and decline" despite a strong US labour market. "Call it scaremongering if you like," adds Paul Ashworth of Capital Economics, but several recent US data releases carried "the unmistakable whiff of a recession." The Markit manufacturing index hit a near-decade low, while the services index also plumbed three-year depths. Retail and motor-vehicle sales are "weak". Markets may be betting that this will prompt central bank intervention, but "monetary policy isn't a magic wand".

Shocks often erupt after a long build-up, says Mackenzie "otherwise known as the boiling frog syndrome". Mortgage and credit excesses had been apparent from 2005, but investors stayed on board to squeeze markets "for a little extra return" before the 2007 crisis. This bull market may have further to run but as risks mount and valuations remain high, "the frog is getting hot".

Recommended

The charts that matter: China upsets cryptocurrency markets
Global Economy

The charts that matter: China upsets cryptocurrency markets

Bitcoin slid again this week after China declared all cryptocurrency transactions illegal. Here’s what’s happened to the charts that matter most to th…
25 Sep 2021
Rob Arnott: Covid's hidden investment opportunities
Investment strategy

Rob Arnott: Covid's hidden investment opportunities

Merryn talks to Rob Arnott of Research Affiliates about some of the unexpected consequences of Covid and their opportunities for investors, plus the "…
24 Sep 2021
Iron-ore price fall hits mining stocks
Commodities

Iron-ore price fall hits mining stocks

The iron-ore price hit a record high of over $235 a tonne in May. But it has since fallen to below $100, sparking a sell-off in mining stocks.
24 Sep 2021
Evergrande: Chinese property giant spooks global markets
China stockmarkets

Evergrande: Chinese property giant spooks global markets

Global markets fell this week as investors worried about the fate of Evergrande, China’s most indebted property developer, which is teetering on the b…
24 Sep 2021

Most Popular

A nightmare 1970s scenario for investors is edging closer
Investment strategy

A nightmare 1970s scenario for investors is edging closer

Inflation need not be a worry unless it is driven by labour market shortages. Unfortunately, writes macroeconomist Philip Pilkington, that’s exactly w…
17 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021