The trade war saga took a turn this week as President Trump, somewhat surprisingly, took heed of advice warning against enacting IEEPA (The International Emergency Economic Powers Act) law to stop foreign investment in US companies. Having accepted his pro-business advisers’ fairly obvious deduction that such actions would be highly detrimental to the US economy, Trump dropped the agenda on Wednesday. However, by Thursday, investors were still having to digest the possibility of US tariffs on Chinese exports, as well as poor Chinese economic data and a downward revision to first quarter US growth data. Trump’s latest move proved insufficient to reassure the market and the global sell-off resumed.
Nerves were most pronounced in the Chinese market with the CSI 300 now at a level nearly 22% below its year-to-date high reached in January. The Renminbi also continued to slide, sparking speculation that the People’s Bank of China was facilitating the depreciation to soften the blow of potentially raised US tariffs on foreign goods. The lack of certainty around what the final policy will look like is making it extremely difficult for the market to price its potential effects on earnings, an issue complicated further by the unquantifiable costs and other effects of substituting cross-border supply chains.
Over in Europe, the EU summit kicked-off on Thursday. Jean-Claude Juncker, president of the European Commission, criticised Theresa May for her lack of progress on Brexit and demanded that the UK state the kind of divorce it wants. He also made clear that Europe is preparing for the possibility of the dreaded no-deal scenario; presumably the Europeans are now factoring in a higher probability of such an outcome after the Brexit Bill passed into law last week without the ‘meaningful vote’ amendment. But, Brexit was not the main item on the summit agenda. If anything the topic has been downgraded to a “fringe annoyance”. The burning issue was the migration crisis on which EU countries have long been divided. Italy’s populist government had wanted to overturn the ‘Dublin Agreement’ where refugees must apply for asylum in the country in which they first arrive, while France had previously proposed sanctions for those countries not taking their fair share. Germany, France’s usual ally, was under pressure going into the summit, with Chancellor Merkel given an explicit mandate from her sister Bavarian party to take a tougher line on migration. Just before dawn on Friday, a deal was clinched and it was agreed that migrants rescued at sea would be sent to “controlled centres” across the bloc for “rapid and secure processing”. This would differentiate between irregular migrants earmarked for return and those in need of international protection, “for whom the principle of solidarity would apply”. Markets breathed a sigh of relief in response to the EU leaders finally managing to agree on something, with the Euro rallying against the Dollar and European equities opening higher on Friday morning.