Interest rate cut, tariffs and trade war - Weekly market update

02 August 2019
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Welcome to our weekly newsletter, where we summarise the key market developments over the last seven days.

There’s plenty to cover this week, as despite hitting the August “quiet period”, markets have been anything but. Read on to hear how we view the current market environment and what it means for us as long-term investors.
 

The Noise

  • This week the Fed carried out its first rate cut since 2008, lowering the rate by a quarter of a point. The initial market reaction to the move was fairly muted, but was suppressed further by Fed Chairman Jerome Powell’s comment that this was a “mid-cycle adjustment”, suggesting that there may not be other cuts in the near future. Markets were then appeased by his subsequent comment that there may well be further easing in future. 

  • Donald Trump announced on Twitter that he will impose a further 10% tariff on another $300bn of Chinese goods. Until now these were untouched by the trade dispute, but this decision leaves almost all US imports from China subject to tariffs. 

  • This lead to a significant drop in the oil price, stoking fears that the US/China trade dispute shows little sign of improving, and could continue to put pressure on global growth.

 The Numbers

Chart-1-(2).PNG


The Nuance 

 
Markets have had a lot to contend with this week; but the micro picture has not been as cloudy as the macro. Indeed we have continued to see quality companies hold up well and even positively surprise throughout earnings season. Even if we do see global growth slow down significantly from here, there are plenty of companies to be found all over the world that have the balance sheet strength, pricing power and structural growth drivers to continue to grow in difficult environments. These companies only become more attractive to investors in weaker economic climates.

In the UK of course all eyes are on Brexit and the increased chance of a “no deal” exit on the 31st of October. Those of you who are UK based and on holiday abroad might well be feeling the squeeze of a weaker pound, but from our perspective as global investors the Brexit negotiations are not overly concerning. Many UK companies actually benefit from a weaker sterling; constituents of the FTSE 100 generate around a third of their revenue from the UK overall, many of these companies have sterling cost bases and earn their revenue overseas. More broadly, the UK market is now very lowly rated by international standards, and while we would expect to see continued volatility as these negotiations play out, market irrationality could easily create fertile hunting ground for long term investors to find quality companies at attractive valuations.
 

Quote of the week

 

“Fatal attraction”. "It seems to be a case of a couple of lovebirds who have made the wrong connection, unfortunately," Western Power spokesman Paul Entwistle
 
Residents of Perth in Australia were somewhat surprised by a major power outage this week, cutting off electricity to more than 1000 homes. The culprits were eventually discovered to be a pair of amorous Kookaburras, whose tryst took place suspended on the town’s main power line. The lethal rendezvous is said to have generated up to 765,000 volts of electricity.

Source: https://allthatsinteresting.com

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