Weekly Market Digest: Markets Regain Footing as Global Tensions Ease

Global stocks rebounded over most of the week as tensions surrounding trade and EM contagion abated. Investors welcomed Treasury Secretary Mnuchin’s invitation to host additional talks with China, as well as the Turkish central bank’s decision to sharply increase rates to support its ailing currency. However, the rally flatlined on Friday due to reports that Trump wants to move forward with $200 billion in tariffs on China, regardless of the new trade discussions.

Weekly Returns

S&P 500: 2,905 (+1.2%)
FTSE All-World ex-US (VEU): (+1.7%)
US 10 Year Treasury Yield: 3.00% (+0.06%)
Gold: $1,194 (-0.1%)
EUR/USD: $1.162 (+0.5%)

Major Events

  • Monday – Reports surfaced that the U.S. is working with France and the U.K. on a possible coordinated strike against Syria should its government use additional chemical weapons.
  • Tuesday – The Trump administration forced the Palestine Liberation Organization to close its office in Washington.
  • Wednesday – Apple unveiled three new iPhones, touting improvements such as faster processors, longer battery lives, and bigger screens.
  • Wednesday – U.S. median household income increased 1.8% in 2017, adjusted for inflation, although much of the increase was attributed to more work hours rather than higher wages.
  • Wednesday – It was reported that Treasury Secretary Mnuchin proposed a new round of discussions with China regarding the escalating trade war.
  • Thursday – In a defiant move to President Erdogan, Turkey’s central bank raised interest rates to help stabilize its currency.
  • Friday – Hurricane Florence made landfall on the east coast of the U.S.
  • Friday – News surfaced that President Trump wants to proceed with $200 billion in tariffs on China, despite the recent invitation for trade talks.

Our Take

Following a relatively wild week, markets regained their footing and moved higher as global tensions eased. Probably the most important development was the Trump administration proposing another round of discussions with China. This was viewed positively by markets, particularly since the discussions would involve more high level representatives than the last round. And it was encouraging China accepted, which follows a similar pattern of softening rhetoric from Chinese government officials. In recent weeks, they’ve made a stronger effort to reassure U.S. companies they will not be the targets of retaliation from the trade war.

All of this is positive, but it’s too soon to tell whether these discussions will amount to anything. Even if they do make progress, new reports suggest the Trump administration could still move forward with an additional $200 billion in tariffs. And while such a scenario could fuel global volatility, we don’t think the tariffs alone are enough to throw China into a hard landing scenario. They certainly won’t help, but China’s fate will be decided by economic conditions at home, where growth is slowing. The government is already stepping in with additional stimulus measures, but eventually it will need to tackle the mounting debt crisis spreading throughout local governments. So far China has proven fairly adept at managing these risks, but there’s no guarantee this success will continue.

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