Investors were caught off guard after the Trump administration announced it would implement a 10% tariff on a further USD 300 billion of Chinese imports, triggering a global correction in equities. China retaliated by letting its currency tumble to 7 versus the USD and halting US crop imports. The conflict escalated further when the Chinese government announced a plan for levies to take effect in two stages, in September and December, on USD 75 billion of US goods, including soybeans, cars and oil. President Trump reacted to China’s move by raising tariffs by a further 5%.
After the US Federal Reserve’s decided to cut policy rates in late July, other central banks across developed and emerging markets followed suit. The ECB made it clear that it is preparing a package of measures. This was echoed by Finland’s central bank governor and ECB official, Olli Rehn. He said the package would exceed analysts’ expectations. Government bonds rallied in line with this material shift towards a more dovish stance.
The rally supported credit markets despite the generally risk-off tone. Investment-grade credit, for instance, rose by more than 2%, while EMU ‘peripheral’ debt gained 1.4%, led by Italian BPTs (+1.8%). Italian government bonds benefited from a sharp contraction of spreads over German Bunds despite the political turmoil that led to the resignation of Prime Minister Giuseppe Conte. For now, the risk of a general election has been avoided as the centre-left and the Five Star ‘anti-establishment’ party have agreed and formed a new parliamentary majority.
Commodities had a poor month (-1.2%), led by crude oil (-7%) and copper (-5%). By contrast, gold rallied by more than 5%, reflecting lower real yields and market concerns over currency depreciation. Despite the fall in the Chinese yuan, the US dollar weakened marginally versus a basket of G10 currencies.
On the macroeconomic front, the US economy slowed in August. The latest PMI survey data showed a contraction in both the manufacturing (49.9 from 50.4) and services indices (50.9 from 53.0). Industrial production fell by 0.2% month-on-month (vs. the 0.1% consensus expectation).
In Europe, the latest PMI data came in slightly above expectations and ahead of previous months for both the manufacturing (47.0 vs. 46.2 consensus) and services (53.4 vs. 53.0 consensus) indices. German manufacturing PMIs stabilised (43.6 from 43.2). However, final GDP growth for Q2 was negative (seasonally adjusted, quarter-on-quarter -0.1%), with a material reversal in capital investment (Q/Q -0.1% from 1.1%).
In China, industrial production growth came in at below the consensus expectation (4.8% vs. 6.0% forecast), while export growth surprised to the upside (year-on-year +3.3% vs. -1.0% forecast).
Exhibit 1: August 2019 returns –a correction in equity markets
Source: Bloomberg and BNPP AM, as of 31/08/2019