Chris Smith

Market Commentary

For the week ending 15 June 2018
Report by Chris Smith
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Chris Smith

This week truly was dominated by momentous geopolitics.

US President Donald Trump made a fleeting appearance at the G7 Summit in Canada over the weekend. The tense meeting concluded with Trump’s Canadian counterpart, Justin Trudeau, stating that Canada would “not be pushed around” by the US. This prompted a characteristic response from Trump, who called Trudeau “very dishonest and weak” on Twitter, while threatening new tariffs on the Canadian car industry which could be more impactful than those already implemented on aluminium and steel imports. The debate on trade looks set to rumble on – let’s hope that it can be resolved in time for the 2026 FIFA World Cup (the US, Canada and Mexico won their joint bid to host the event this week)!

Trump had had time to agree a joint communique with the rest of the World leaders present, upset them by saying Russia should be there, withdraw the agreement by Twitter and have one of his advisers declare there was “a special place in hell” for Trudeau for “stabbing him in the back”. Just another day on the stage for the World’s most powerful showman.

He then boarded Air Force One, bound for Singapore and the much anticipated Summit with North Korean leader, Kim Jong-un. Less than a year ago, Trump had threatened Pyongyang with “fire and fury”, while as recently as January he had referred to the secretive state’s Supreme Leader as “rocket man”. To see the two men together was something to behold.  Them reaching agreement on a way forward was a considerable feat and the sort of stuff about which history is written. President Trump later claimed that his earlier rhetoric was all part of a calculated strategy to bring Kim Jong-un to the table.

The impact of his brash approach in negotiations with the democratically elected leaders of the developed World, whilst courting those of Russia and North Korea, remains to be seen.

There was also an eventful update on monetary policy in both the US and Europe. On Wednesday, the Federal Reserve (Fed), as expected, elected to lift US rates by 0.25% for the second time this year, the seventh hike this cycle. The Fed also indicated that two further increases are likely this year, followed by three more in 2019. The S&P 500 moved lower to close down 0.4% on the day, though the move didn’t feel particularly panicked. This was most likely due to the hike being supported by the Fed’s relatively bullish assessment of the US economy, with accelerating growth and job creation noted.  Interestingly, the market did not seem overly concerned by the Fed’s statement dropping reference to keeping rates below their long-term norms, something that could become of greater significance should economic data weaken.

The European Central Bank (ECB) meeting followed on Thursday. President Mario Draghi announced that the bank will begin to taper its three year €2.4trillion stimulus programme over the remainder of the year. The market had expected this news to be forthcoming, albeit the announcement came a little earlier than anticipated. However, the hawkish message was dampened somewhat by an accompanying notice that interest rates are unlikely to rise until at least mid-2019 in the Eurozone, longer than some in the market had foreseen. Coming so soon after the Fed’s announcement, the stark contrast between the two economies’ interest rate cycles was quickly reflected by markets – the Euro dropped 2% against the US Dollar over the remainder of the day. It will be interesting to see how both the monetary policy and political environments develop from here.