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Weekly Manager Views

Friday, July 13, 2018

Please find below the notes from GAM Investments’ Weekly Investment Meeting on 11 July 2018 – this week’s speaker was Larry Hatheway, who discussed the possible effect of the US imposing further trade tariffs on China and the implications of political manoeuvring in the UK for Brexit and sterling.

Larry Hatheway
  • The US trade representative announced on Tuesday that the US will review a 10% tariff on an additional USD 200 billion of US imports from China. This was announced as a supplemental action to the existing section 301 case, based on the earlier round of tariffs on Chinese imports. That is important. Rather than starting a new investigation – which could take up to a year – Tuesday’s move will expedite the review and hearings, which are expected to take place from 20-23 August. Accordingly, new tariffs could be imposed as early as September. Hence, this is an aggressive stance taken by the Trump administration. It is therefore surprising that the market reaction has thus far been moderate.
  • One reason why is that the response from China has been relatively subdued, even though a government spokesperson commented on Wednesday that China would respond. To be sure, China only imports about USD 150 billion annually from the US (as opposed to the approximate USD 500 billion import bill that the US has from China). But that does not rule out a potential escalation. China, for example, could impose even higher tariff rates or it could announce other non-tariff barriers to goods and services. It could also curb investment flows into China and it could also informally support boycotts of US goods. Were it to do so, there seems every reason to believe the US would also respond, resulting in even greater escalation.
  • Fears of trade conflict are likely to put investors on the side lines again, particularly as we enter the quieter summer holiday period. In various multi-asset strategies, we had been looking at ways of adding equity risk this week, but are likely to now hold off. It would be surprising if many investors did not reach the same conclusion.
  • In terms of data, US inflation data was released this week. For both PPI and CPI there has been an acceleration this year. On Wednesday core producer prices rose at a faster-than-expected 0.3% month-on-month rate to a 2.8% annual rate (up from 2.4% year-on-year in the previous month). Core consumer prices rose on Thursday at a 0.2% rate month-on-month and 2.3% year-on-year. The data comes ahead of the release of the prepared text for Federal Reserve (Fed) chairman Powell’s semi-annual address to Congress next week. Notwithstanding trade tensions, the underlying US inflation and growth data economic data – consensus forecasts for Q2 put annualised GDP growth at 4% – will likely mean that in his prepared remarks and the Q&A next week Powell will reaffirm the Fed’s intention to raise rates in September and December and continue its process of tightening in 2019. Accordingly, it seems likely that US bond yields will not fall much below current levels, barring a major shock.
  • Lastly, regarding Brexit Prime Minister May has won a tactical victory over her hard-line Brexit Tory rivals, splitting those that remain in the cabinet (Gove) from those that resigned last weekend (Davis and Johnson). Despite talk of a potential leadership challenge, it does not appear that the ‘hard Brexit’ camp have sufficient votes to muster a serious challenge. Still, the outcome of negotiations with the EU are fraught with risk. The preferred option of the UK government – a customs union for goods (not services) that preserves an open border between the Republic of Ireland and Northern |reland – would require the EU to concede on key issues, such as the jurisdiction of the European Court of Justice and the free movement of labour and capital within a customs union. The upcoming negotiations are likely to be difficult, which at times will introduce volatility into markets, above all sterling’s exchange value versus the euro.

    To read Larry's latest Multi Asset Perspectives please click here.

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The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.
July 2018

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