Quilter Cheviot's David Miller discusses the escalation in the trade war between the US and China
Markets remained on edge last week with daily movements exhibiting reason, if not rhyme. Equities moved higher, except in the US, and bonds lower. The dollar was the currency of choice for the second week in a row.
The reasons are in plain sight. If investors are presented with an escalation in the trade war between the US and China then, most likely, they will react by selling the shares of the big companies like Caterpillar and Boeing that will be disadvantaged.
Similarly, when social media is in the ‘dock', the companies that provide the infrastructure are unlikely to be at the top of anyone's buy list.
The arithmetic of indices is entirely transparent. If the share prices of the top technology companies and a few of the largest manufacturers are going down, then indices will reflect this. The temptation to over-engineer the reasons behind short-term volatility should be avoided.
Chinese tarrif retaliation
The sectors affected by Chinese tariff retaliation are clear enough: soya beans, cars and a few miscellaneous chemicals.
The precision is impressive, directed as they are at the Midwest Trump voting states, but there is more.
I suspect that neither the US nor China wants to damage economic growth, which is why implementation delays have been built in by both sides, leaving plenty of time to negotiate compromises that can be presented as victories.
Whether the US decides to pursue the much bigger issue, which is how to protect its intellectual property, is an entirely different and much more serious matter than a few tonnes of steel. We won't know about this for some months to come.
A quote from a retired commodity trader and Diary reader: "The one thing I learned from 25 years' trading with the Chinese is that we in the west are at kindergarten level versus the PhD Chinese. Mr Trump has no clue what he has started and has zero chance of outwitting them."
For the avoidance of doubt, a proper trade war would matter, and so being on the right side of change will be very important. Is this analysis of the likely course of events too rational for its own good?
Emotion can sometimes overwhelm the best laid plans. I remember that when I first started managing money, top of the confusion list was when to suspend rationality.
Behaving in an irrational way is not my natural game, but over the years I have learnt to suspend judgement on an occasional basis in the interests of making a good investment return. Is this one of those times? I don't think so, but neither is it a time for complacency. Moving on.
A quick tour of the world provides some illumination. European economic growth is slowing. What seemed like a boom in January is now no better than average. The strong euro is having an effect, while the politics is as messy as ever.
There is as yet no government in Italy, although after a long delay Germany has one. The problem is that the German establishment fight with AfD is now in full view. In France the Macron change agenda has come up against entrenched opposition from the railway unions.
On this side of the Channel, Peugeot has decided to continue making vans in Luton despite Brexit and Melrose is now the owner of GKN unless the current generation of political Widmerpools finds an excuse to interfere.
Much has been written about protecting our industrial heritage, but most is irrelevant. A British company has taken over another British company, and GKN now only employs 6,000 people in the UK compared to 69,000 in 1979. For the sentimental, when the FT 30 Index was created in 1935, GKN was a founding constituent. The only others still in existence are Tate & Lyle, Imperial Tobacco and Rolls Royce.
Back in the US, economic growth is refusing to cooperate with policy. Hitting 3% growth in 2018, let alone 4%, may be a challenge.
Consumers aren't spending enough and, although new jobs are being created at a good rate, last week's non-farm payroll numbers were far from exuberant. Purchasing manager indices (PMIs) are moving down to the real numbers.
As we move from April into May, we will hear more about the health of the global economy, most likely supporting the view that we remain in a period of synchronised economic growth without too much upward pressure on inflation.
A good results season from corporate America delivering 15% earnings growth is needed to settle nerves.
David Miller is investment director at Quilter Cheviot
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