To paraphrase a colleague, “The trade war is a reality”, for almost two months, the tension between the US (and at least until the November elections) and its “partners” Europe and China, is at its peak. Each news in one sense is answered by the other party and all of them with a single common denominator: Increase in tariffs.
Obviously, these barriers will at some point lead to lower growth and higher inflation globally. So far, both macro magnitudes have hardly been affected by these episodes. In the case of growth, the impact is not “very visible”, while in the case of inflation, the latest data available, are more the result of a temporary effect of the rise in the prices of raw materials. Especially to the rise in oil, which in a year has revalued from $ 50 to the current $ 73 and if we transfer the currency effect, the difference is also important: from 43 euros a year ago, to the approximate 62.5 that trades today.
Logically, these effects will have their transfer to economic data, while the implications of the different policies of Central Banks are having theirs in emerging economies, especially those most vulnerable because they are more indebted in dollars, (Argentina, Turkey, South Africa, etc ..).
However, the June correction for outflows, mainly in the Asian market due to fear of new tariffs, seems excessive to us due to the limited real impact on their economies, which is why these outflows make the prices of certain assets attractive, although these are at the cost of greater volatility at the expense of the US elections in November.
On the market side, we find a scenario where all fixed income assets continue to show negative returns in 2018. The existing liquidity of the market is at minimum levels since the correction suffered by the market at the beginning of 2016 (China, DB, Raw materials, …), amplifying both the corrections and volatility. Although more defensive, we see how widening spreads have hurt almost all fixed income portfolios.
The positive news, which leaves us these last two weeks of the market, comes from the side of a better moment of the primary market, a determining fact for the final part of the year, especially for those more conservative investment portfolios, where liquidity begins to be a real headache with a significant cost.
Oscar Moreno | Rent 4 Bank