By: Alan Liang
Last week, China signaled its readiness to go toe-to-toe with President Donald Trump’s campaign of tariffs by planning its own retaliatory measures on about $3bn in US imports. However, China has made it clear that these measures are in retaliation for US steel and aluminium tariffs announced earlier this month and not the 25 per cent levy on up to $60bn of annual imports that President Trump unveiled last Thursday. Heightened fears over an even tougher response from China and an all-out trade war between the world’s largest economies is likely to prompt further sell-offs in the equities market.
Locally, strong performance by energy and mining stocks were overshadowed by the losses sustained by the banks from the royal commission. Global equity investors are beginning to question the CEOs of the Big Four banks about compliance and regulatory costs and this will continue to put downward pressure on the Australian share market.
Fearful of a trade war, investors have resorted to safe haven investments like gold and silver. It is possible that prices may continue to increase in response. Oil is also expected to climb higher due to the continuing efforts of OPEC and its allies to curb global supply. This increase has been exacerbated by Trump’s appointment of John Bolton as the new National Security Advisor. Bolton is perceived to have a more hawkish foreign policy stance which has investors considering whether that could lead to sanctions on Iran, including restricting oil supply. Copper, which has fallen to three-month lows, may continue its downward trend as concerns escalate about US trade tariffs.
Last week, The Bank of England voted to hold the interest rate at 0.5% but, hinted at raising interest rates as early as May. Some key policy makers wanted an immediate increase, arguing the slack in the economy has been used up and wage growth is accelerating. It will be interesting to see how the market reacts to Q4 UK GDP data released this Thursday. If economic indicators suggest robust business activity and surpass growth expectations, we believe this will put upward pressure on the GB pound.
Later in the week, CPI reports from Germany, France and Italy will be released to shed light on the performance of the Eurozone economy. Poised towards weaker growth in 2018, inflation data from the Eurozone is expected to fall relative to the strong growth experienced at the end of last year. Most investors expect the European Central Bank (ECB) to ease off its quantitative easing program by September. But, if low inflation expectations are confirmed and more data like this comes out, the ECB is seen as more likely to support interest rates at historically low levels.