Markets recorded their worst week of the year in May, after the trade negotiations between the US and China collapsed and tariffs were hiked. The threat of an escalation in the trade war now seems even more likely. President Trump banned US companies from doing business with the Chinese giant telecoms company Huawei, elevating the current trade war to a tech war, causing much greater consequences for both countries. Regardless of the outcome of these negotiations, China will continue to focus on becoming a global superpower, leading to heightened volatility over the coming months as the stand-off continues.
UK Prime Minister Theresa May has accepted the inevitable and stepped aside, announcing her resignation to finally leave Downing Street on 7 June. For extra uncertainty, recent European elections have implied that the UK is still hopelessly divided between Leave and Remain and whoever wins the race to become the next Prime Minister will have the uneasy task of attempting a resolution. If necessary, Parliament is still likely to halt the process and prevent a no-deal exit. Alternatively, another referendum or a general election would be a risky strategy amongst the British people as opinion remains split. Even though the UK economy continues to show positive signs as it carries along without much stress, this uncertainty will most likely keep UK equities as well as Sterling subdued. Two of our UK focused funds, TB Evenlode Income and Castlefield CFP SDL UK Buffettology managed to escape losses throughout this turbulent month as they showed moderate gains of 0.8% and 0.6% compared to the FTSE 100 and FTSE All-Share averaging losses of 3.5%.
President Trump and Chinese President Xi Jinping are expected to meet at the G20 summit in Japan this June after the Trump administration raised tariffs to 25% on $200 billion worth of Chinese imports. This was soon retaliated by Chinese tariffs on $60 billion of US goods. The end result will be significantly higher prices for both consumers and businesses in the US and China, harming manufacturers that rely on imports. Whether the Americans are playing a short-term game with global trade, only to switch sentiment and capitalise on tactical gains is anyone’s guess. However, it has certainly disrupted the market, adding fuel to a slide in equities and drop in government bond yields over fears on trade escalation and the potential drag to global growth. The focus on global politics has engulfed the public in the US as Donald Trump has now threatened Mexico with a series of escalating tariffs in response to the “migration” crisis at the southern border. Interest rate cuts would be an option to provide some growth stimulus and Federal Reserve Chairman Jerome Powell signalled an openness to cut them if necessary, but whilst the direction of the economy is still unclear, they are almost certainly on hold for now. Our Baillie Gifford American fund outperformed the S&P 500 by 3.5 ppts in May.