30 July to 5 August: More smoke than fire

According to speculation reported by Bloomberg, US Treasury Secretary Mnuchin and Chinese Vice Premier  had private discussions in an attempt to restart stalled trade talks between the two super powers that have been roiling financial markets for too long. Meanwhile US Trade Representative Lighthizer officially stated that the US administration has been considering increasing its tariffs from 10% to 25% on USD 200bn worth of Chinese imports.

A key aspect of the story, in our view, is that President Trump and the Republican party are preparing for the midterm elections held in November. Although the populist rhetoric may appeal to voters, the room for threats and economic blackmail is rather limited, since a fully blown trade war would not only weigh on Chinese growth but could dampen US business cycle as well. We remain of the view that the Trump administration is not willing to endanger global economic growth, as it would hurt the US economy, and ultimately would erode standards of living for ‘Average Joe,’ who is the backbone of the incumbent administration’s voting base. Consequently, the POTUS and his team will not escalate the trade war to such an extent that kneecaps the world economy.

US stock markets have ignored most of the recent trade war-related noise, as the S&P500 has increased five weeks in a row, which is the longest streak this year. Since the beginning of the year, the index has risen 5.83%. The recent stock market momentum was driven by strong Q2 earnings, as the overwhelming majority of companies in the S&P500 that have already reported have exceeded expectations. As a result of the strong earnings season and the upbeat stock market sentiment in the US, Apple has become the first company with a market capitalisation over USD 1tn.

Looking ahead

This week is not going to be as exciting as last week, as central banks take a pause, but markets will still have a lot to digest, as the negotiations between the US and China continue and an announcement that can swing markets either direction can arrive at virtually any time.

A limited number of macro data are going to be published in developed markets this week. Germany releases July industrial production figures, and Japan publishes 2018 Q2 GDP data. On Friday, CPI inflation from the US should serve as further evidence that the Fed has more than enough room for manoeuvre to deliver the 25bp hike in September.

Chinese macroeconomic data will dominate this week’s news flow in the emerging market spectrum, as the country publishes foreign exchange reserves, inflation and foreign trade data. Apart from China, Brazil, Mexico, and Colombia release inflation data this week.


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