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MARKET UPDATE: ECONOMIC CONCERNS WEIGH ON SHARES

LAST WEEK – KEY TAKEAWAYS

Shares: Prospect of economic slowdown rattles markets

  • Global shares fell after the yield (the income paid) on long-term bonds issued by the UK and US governments dropped below the yield of their shorter-term equivalents, an effect known as an inversion of the yield curve;
  • Usually investors expect a higher return for putting their money away for a longer time- by demanding more for investing in the short term, they are indicating that they are concerned about the health of the economy;
  • Investors closely monitor the yield curve because in the past, an inversion has preceded an economic slowdown;
  • Trade tensions between the US and China appear to be the ultimate catalyst, as figures released last week showed slowing growth in the Chinese and German economies which both heavily rely on global trade.

    Omnis view: It is too early to tell whether this inversion signals a recession. The major central banks are taking steps to support their domestic economies by keeping interest rates low or lowering them, although further escalation of trade tensions would raise the possibility of a slowdown (see below).

TRADE: US to delay tariffs on some chinese goods

  • There had been better news for global shares earlier in the week when US trade official Robert Lighthizer said the US would delay imposing the latest round of tariffs- taxes on companies importing products from abroad- on some Chinese goods from September until December
  • Mobile phones, laptops and video game consoles are among the goods exempt from tariffs, which means US consumers will not face inflated prices ahead of the festive shopping season;
  • However, later in the week China announced that it would respond to these additional tariffs by taking unspecified measures of its own.

    Omnis view: The Chinese appear to have rebuffed US attempts at easing tensions. Whether or not upcoming talks between the two sides go ahead as planned and how these latest developments impact negotiations remains to be seen.

UK: Labour seek cross-party support to stop hard brexit

  • Sterling strengthened against the US dollar following the release of figures showing retail sales- a measure of consumer spending and a key driver of economic growth- unexpectedly rose in July;
  • Sterling received another boost after the Labour party outlined a plan to prevent a hard Brexit by calling for a vote of no confidence in the government as soon as parliament returns from its summer recess on 3rdSeptember;
  • If successful, Labour would form a temporary government, extend Article 50 and then call a general election.

    Omnis view: It is unclear whether enough MPs from other parties (including the Conservatives) would back Labour’s plan – the Scottish National Party pledged its support, but the Liberal Democrats rejected the plan and suggested alternative candidates to lead a temporary government.

    LOOKING AHEAD – TALKING POINTS

    Economic data

    Friday- Japanese inflation rate in July.

    G7 summit

    Prime Minister Boris Johnson makes his debut on the international stage at the G7 summit- a meeting of the world’s seven biggest developed economies- taking place in France over the weekend.

    Jackson Hole

    On 22nd and 23rd August there is the annual meeting of monetary policy makers from around the world. The messages that come from this meeting are keenly watched, particularly the views expressed by the US Federal Reserve.