Weekly Market Commentary: 31st May 2019

Trump Threatens Mexico with Tariffs over Immigation Row

This week markets have been rattled by a further escalation in Donald Trump’s trade war, when he opened a new front with Mexico. Despite renegotiating the NAFTA agreement more to his liking, he has now threatened to impose tariffs unless Mexico does something to stem the flow of immigrants crossing the Southern border. This comes in the same week that the confrontation with China spilled over into diplomatic channels, with the UK taking fire for defying American orders not to work with Chinese telecoms firm Huawei.

Since the trade negotiations fell apart and the trade war restarted on the 5th May, the S&P 500 is down around 5%. This suggests that while the increasing hostilities are gaining a lot of press coverage, they’re not troubling investors too much for now. This is probably because no-one is taking it seriously and expects it all to blow over. That feels too optimistic to us, we wouldn’t be surprised to see this drag on another 12 months, before a big truce is declared just before the presidential elections next November.

Europe: Italy and the EU Renew Hostilities over spending

This week the EU sent a letter to Italy kickstarting renewed tensions between the pair.  Brussels is unhappy with Italy’s lack of progress in cutting down the ballooning debt to an acceptable level. If the nation fails to produce a clear plan on tackling the debt burden, it could potentially be fined for breaking budgetary rules. However, swelling support for the populist government whose key election campaign focuses on cutting taxes, along with the fact that no country has been fined previously will most likely see Italy refuse to comply with EU demands.

Elsewhere, Portugal became the first eurozone country to tap into China’s colossal debt market, issuing a three year $289m “panda bond” (non-Chinese bond issued in local currency). The “panda bond” will help the country widen its investor base. China’s increasing presence in the international debt markets coupled with the highest savings rate in the world has made launching sovereign bonds in this area an attractive proposition. Austria looks set to be the next eurozone country to enter the Chinese market.

Autos: Brexit Cuts car manufacturing by almost a half

UK car production fell 45 per cent for the month of April as manufacturers battened down the hatches for a Brexit storm that never came. Annual stoppages normally scheduled for the summer holidays were bought forward to cope with a No Deal Brexit. Other additional costly measures were also implemented such as rerouting logistics and gearing up training for the new customs procedures.

Meanwhile electrification, autonomous vehicles and unconventional industry entrants have all increased the pace of consolidation within the global auto industry. As a result, merger activity has increased as companies seek to increase economies of scale in order to keep up. Industry mergers last year doubled to $98bn and this week Fiat Chrysler (FCA) proposed one of the largest auto tie-ups with Renault worth $37bn. The new group’s combined annual revenues of $189bn and $8.9bn net profit makes it one of the largest groups in the sector. FCA vowed not to close any plants a fact that could help the deal be approved by both Italian and French governments the latter which has a significant stake in Renault.

Commodities: Arcelormittal Announces Further Steel Cuts

ArcelorMittal announced a second round of cuts in steel production this month as persistent market weakness and surging imports into Europe have impacted the firm. Shares in the company fell seven per cent after the announcement. Steel lies at the heart of trade wars with costly tariffs applied by President Trump last year. With escalating trade tensions between China and the US, European steel makers fear the bloc will become a dumping ground for material destined for the US if further tariffs are applied.

In addition, steel makers continue to struggle in the UK. In its heyday (1970) the industry employed over 300,000 people but this has dwindled to 31,900 with just two operating blast furnaces left. Steel contracts, like most commodities, are typically agreed well in advance of delivery. With Brexit uncertainty continuing until October, overseas buyers are reluctant to place orders as tariff rates could be subject to change. This uncertainty has brought previously struggling British Steel to its knees last week. The government continues to prop up the steelmaker as it searches for a buyer.



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