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Euro-sceptic Gains Expected In Parliamentary Elections

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Equity markets were up roughly half a percent on the week as there were some developments in the three topics driving markets: Trade, Chinese growth and Brexit.

Trade talks are continuing and the base case scenario on trade has not changed. This is that there will be a pause that lays out a series of policy milestones over the next several months while holding tariffs at the current level until goals have been reached. This should be positive for markets and supportive of the Chinese yuan. However, on Sunday the US Department of Commerce submitted a report on the US auto sector to Trump. Whilst the contents are not known, it is believed that the report recommends imposing tariffs on auto imports into the US. Trump has 90 days to make a decision on what to do but some analysts are suggesting a stay of execution is possible if the US peruses negotiations with trade partners to address the sector.

Turning to Chinese data – it appears that stimulus may be starting to bite. Investors saw Chinese home price growth rise to a 19 month high, which is important as the Chinese property sector is estimated to account for 15% of Chinese GDP. Though positive, the markets have not seen enough to stop worrying about Chinese growth, so this remains an important area to watch.

Regarding Brexit, the headline news this week was that 8 Labour MPs and 3 Conservative MPs left their parties to form a new Independent Group. This morning, a 9thLabour MP left the party but has not said he is joining the independent group. At 11 strong, this group is as large as the Liberal Democrats and larger than Mrs May’s DUP allies, so has some weight and could swing any votes on Brexit, such as the Cooper Amendment which seeks to delay Brexit. According to several sources, Cooper has more support than when her amendment lost narrowly last month. This leads reinforces the view that a hard Brexit will be avoided.

Elsewhere, The European Parliament produced its own forecasts on the result of the EU Parliamentary elections that will be held in May. Strikingly, it predicts that Eurosceptic forces will win a fifth of the seats, with Italy’s ‘League’ predicted to become the second largest party holding only two fewer seats than Angela Merkel’s CDU party. This will impact the policies and legislation the EU parliament is able to enact and such an outcome will affect European stocks and bonds.


As we told you in mid-January, the US Federal Reserve hit the pause button. However, futures markets are currently pricing in not just a pause but the end of interest rate hikes in the US. For every Fed meeting this year, markets are ascribing a higher probability of a cut in interest rates than a hike. We think this is excessive and believe this sets up the market for a negative surprise. This is something investors should watch as it could be a source of concern as the year goes on.