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May has certainly been a challenging time for global equities, but in terms of weakness the market has not suffered that badly, particularly as sentiment began the month leaning towards a “healthy” correction after impressive gains since January dawned.

The MSCI All-World index has only eased 3.5 per cent from this year’s high. True, the All-World index excluding the US is down 4.5 per cent, but that represents not even half a correction in equities (defined as a 10 per cent fall from a recent high). Outside of a 9 per cent drop in China’s CSI 300, developed world markets have held up, with the S&P 500 just over 2 per cent shy of its recent peak, while Europe’s Stoxx 600 is off some 2.3 per cent from its April high.

One can argue that the resilience of equities suggests that cooler heads will eventually prevail over trade. The US delay in applying tariffs on car imports on Wednesday is seen in this light, but some see this action as merely confirming the White House heat over trade is being directed at a full blow torch temperature towards China. This is underscored by President Donald Trump signing an executive order that bars US companies from doing business with foreign telecom suppliers. Clearly this is aimed at China’s Huawei and ups the US fight over technology, a key part of the dispute for White House trade hawks. 

As Brown Brothers Harriman note:

“This is a very serious move and supports our belief that both sides are digging. We do not see any deal coming soon.”

Their outlook remains gloomy beyond China and the US over trade.

“This latest flurry of changes in trade policy signal greater confrontation ahead, not less. If and when China is settled, the US will simply move on to its next trade skirmish. Within this larger context, it’s hard to be bullish on EM on any level.”

The relative composure of equities also reflects the support that comes from lower sovereign bond yields. As noted earlier in the week, this is a doubled-edged blade for risky assets such as equities. It may well be the case that bond yields have fallen too far, but some think they have scope to fall further unless the trajectory of economic growth reverses.

Music to the ears of a Treasury bond bull is Citi’s take:

“OECD leading indicators are close to their lowest levels since the GFC [global financial crisis] and we struggle to find any rationale why these trends may all of a sudden reverse, especially in the US.”

The bond market appears primed for US tariffs sticking around for some time, while equities cling to the hope of a repeal. 

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Quick Hits — What’s on the markets radar

The pound feels the Brexit blues — Sterling is below $1.28 and at a three-month low as the risk of no-deal picks up again. Cross-party talks between the ruling Conservative party and Labour are dead in the water, while Boris Johnson on Thursday threw his hat into the leadership ring and Theresa May agreed to set out a timetable for her resignation as prime minister.

Currency ill winds — A gloomy outlook from Deutsche Bank’s George Saravelos on Thursday for the summer as he notes:

“We do not see a quick resolution to the trade war and argue that Chinese authorities will become more amenable to currency weakness. The JPY should be a continued beneficiary of global volatility and we forecast a move down to 105 in USD/JPY. In the midst of this turmoil EM remains vulnerable.”

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