04.12.2019 10:18

Market Outlook: Trump reloads his trade weapon

Weak manufacturing data and new tariff threats push stock markets lower

Stock markets have remained largely unchanged or have lost ground this past week, which is not so strange after several weeks of upturns and new record highs. The recent market rally was partly based on hopes that trade conflicts were moving towards resolution, but it was also based on better-than-expected macroeconomic data in the United States that actually began in September – judging from Bloomberg's "surprise index" (which shows to what extent economic outcomes meet expectations). This week stock markets have thus cooled down because of weaker purchasing managers' indices than anticipated and new American tariff threats.

Trump reloads his trade weapon

After a relatively calm period, on December 2 the US announced several new trade-related actions: tariffs on steel and aluminium as well as new "luxury tariffs". The metal tariffs are aimed at Brazil and Argentina. According to President Donald Trump, this is a response to their currency devaluations, which make US farm goods less competitive. The proposed tariffs on French luxury goods are a response to France's new digital services tax, which will affect American technology companies. The US will also investigate digital services taxes in Austria, Italy and Turkey. In our assessment, the need to protect the US economy ahead of the November 2020 presidential election nevertheless imposes some limits on how far Trump can go in the trade area. The impact of his tariff threats in the form of falling share prices should thus have sent a signal to the White House as well.

Trump's reference to exchange rates as one reason behind some of his actions awakened fears that he is back on the currency warpath. He also linked his tariff announcements to a statement that the US Federal Reserve should cut its key interest rate in order to bring down the value of the US dollar. The Fed has already cut the key rate three times this year in response to a decelerating global economy. We do not expect continued weak manufacturing sector data to persuade the Fed to retreat from its wait-and-see attitude at the next policy meeting on December 11. Another Fed rate cut may be needed next year, but perhaps not as early as January.

US enacts new Hong Kong law but tones down its impact

The US Senate unanimously and House of Representatives overwhelmingly approved a bill that supports the demonstrators in Hong Kong. It will require a yearly review of Hong Kong's semi-autonomous position as a condition for retaining its favourable trade status and it also opens the way for possible sanctions. Although President Trump has signed the bill into law, he has signalled that he does not want it to affect broader US-Chinese relations. Market reactions to his statement last week were also moderate.

Gloomy November reflected in Swedish consumer confidence

Many parts of Sweden reported unusually few hours of sunlight in November. The newly published Economic Tendency Survey from the National Institute of Economic Research (NIER) points to weaker sentiment than normal in the Swedish economy, although the overall Economic Tendency Indicator climbed marginally to 94.7 in November. The low level of the NIER's consumer confidence indicator is mainly due to unusually pessimistic expectations for the Swedish economy during the coming year.

Unusually pessimistic households (link to NIER)

 

Our market view

Clear signs of stabilisation in macroeconomic statistics have provided continued support to stock markets. A number of equity indices, including both the broad American S&P 500 and the narrower Swedish OMX index, have reached new highs, although recent days have brought a correction. Signals from US-Chinese trade talks are also constructive, while the Brexit issue (British withdrawal from the European Union) has been pushed lower on the risk list.

Dovish signals from central banks are providing support, although after its October rate cut the US Federal Reserve (Fed) is now signalling that it will await coming economic developments. Long-term bond yields have rebounded after this year's sharp downturn, but they remain at extremely low levels.

Early this autumn, macro statistics reinforced the picture of continued global deceleration. The most recent signals are pointing upward, or at least towards a broad-based stabilisation in major economies, though of somewhat varying strength. Together with support from central banks, this means that we foresee less risk of recession over the next couple of years. This applies especially to the US, where a continued solid labour market is helping to sustain growth.

The uncertain economic situation, along with rising share prices, is stretching market valuations further, suggesting price fluctuations ahead. The lack of investment alternatives (due to extremely low interest rates and bond yields) and decreased risks related to both growth and trade problems may nevertheless provide continued support to stock markets.

We continue to have a cautious attitude towards stock markets in the near term. Better (less bad) economic statistics and third quarter corporate reports that are better than previously feared are on the plus side, but with stock market indices at or near new all-time highs there is an obvious risk that good news is already largely priced in.

This week's agenda

  • December 2-13 – The 25th United Nations Climate Change Conference, "COP25" is taking place in Madrid. Its aim is to discuss and make decisions on follow-up measures to the Paris Climate Change Agreement. The climate issue will also top the agenda at the European Union summit on December 12-13, preceded by a presentation of the EU's Green Deal, which is expected to include more green ínvestments, an opening for climate-related subsidies and "carbon border taxes" on countries that do not meet EU climate change standards.
  • December 3-4 – The NATO summit including President Trump and his French counterpart Emmanuel Macron is under way in London.
  • December 4-5 – Meetings of the OPEC oil cartel and OPEC+ (which includes Russia and other non-OPEC producers) on production quotas and other matters (read more at Bloomberg).
  • December 6 – US labour market data are expected to show a strong November, partly due to the return of General Motors workers after their strike was settled. Looking ahead, however, US job growth is expected to slow.

Please contact your private banker if you have any questions or concerns.