Trade-War worries ease — what’s driving equities now?

Last week, geopolitical headlines overshadowed most other events across the globe and drove equities—most of which closed higher as trade tensions eased. As equities enjoyed some relief, bonds had a tougher week. US Treasury yields rose sharply, most likely due in part to a slightly hawkish slant from the US Federal Reserve March monetary policy meeting minutes.

European bond yields were also higher, though moves were more muted than those seen in US bonds in response to some dovish European Central Bank (ECB) monetary meeting minutes. That said, it could be argued that this wasn’t necessarily an assured “risk-on” week as such, but neither was it “risk-off”. The lack of conviction from investors appeared evident looking at trading volumes last week, with some hitting their lowest levels year-to-date.

There were further signs of easing on the trade front. There were reports that a NAFTA deal was close to becoming a reality on the back of speculation that the United States could re-join the landmark Trans At the beginning of last week, investor concerns remained focused on potential trade wars ahead of Chinese President Xi Jinping’s speech at the Boao Forum on Monday. Xi delivered a series of positive messages on liberalisation, on strengthening intellectual property right protection and on expanding imports. His address appeared to follow through with one of US President Donald Trump’s requests to lower tariffs on autos—which saw an easing of tensions and a rally in the auto sector—although these measures had already been discussed since last November.

Xi’s speech was well received by Trump, who said the two countries could reach a deal on trade and set a more collaborative tone—a step away from the more divisive rhetoric we have seen in recent weeks.

Pacific Partnership (TPP) trade agreement. These developments led to some cautiousness from Japanese Finance Minister Taro Aso. He made clear that, like many, he feels this is a changing situation that can vary day by day. In our view, there is more at stake here for Japan since the country was not spared under Trump’s steel and aluminium tariffs.

Geopolitical tensions rise

Outside of the trade-war theme, Russia was the other main influence on global equity markets last week. Trump’s additional sanctions against Russian oligarchs with ties to Putin led to a decline in the Russian rouble.

Alongside these sanctions, the ongoing situation in Syria stirred up tensions between Russia and the West. What appeared to be a poison gas attack in Douma last week prompted threats of military action from Trump and his European Allies. The United States, United Kingdom, and France launched coordinated air strikes on Saturday morning, against what were purported to be Syrian chemical weapons factories.

These dramatic headlines sparked a wealth of debate and weighed on global sentiment, but there the rise in geopolitical tensions boosted the price of oil as the potential for supply-chain disruption encouraged buyers. Basic resources stocks were generally higher last week amid strength in underlying commodities. The sector also enjoyed some relief amid easing trade-war tensions, which had been a weight.

Turning point for the United Kingdom?

We’ve previously noted that some UK stocks were being disproportionately punished for any less-than-positive earnings results, as uncertainty around Brexit weighed on investor sentiment.

We don’t want to speak too soon, but it does look as if the tide may be turning for UK equities. A number of mid-cap stocks have made outsized gains on the back of good earnings numbers or positive news, making it feel as though investors are looking for a reason to buy.

Alongside this, the pound is closely approaching breakout levels against the US dollar and the euro. We sense a feeling that the worst may be behind for the United Kingdom. Bank of England Board Member Ian McCafferty’s comments last week that the central bank should not delay increasing interest rates also likely helped sentiment. However, it’s not an entirely rosy picture. Colder weather and waning consumer confidence has led to the worst quarter in five years for consumer spending.

Brexit negotiations are set to resume in the week ahead, and we’ll be keeping an eye out for any headlines that may affect sentiment towards UK equities.