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Potential negative effects on world growth

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This week has been all about tariffs again and the potential negative effects they could have on world growth, business confidence and investment. Whereas last week there had been a lot of talk but markets did not really move that much this week has been different with global equities down over a percent, bond yields lower and measures of volatility on the rise.

“China is a sleeping giant. Let her sleep, for when she wakes up she will move the world”.Who said that?

The quote is attributed to Napoleon.

It is almost as if Trump wants to send China to sleep again but we do not think that will work. China we believe will do everything it can to not buckle under pressure and can play the long game.In fact there is a high probability that the Chinese will overreact to the risks to growth , much like they did in 2009 and 2016. And everyone in the world wants to sell stuff to China.

Consider this. Excluding cars, retail consumption in China reached $ 4.6 trillion in 2018.This compares to $ 4.3 trillion in the US so the structural growth story of China consumption remains strong.According to Quartz, China now represents more than 30% of the global market in luxury goods, automotive, consumer appliances, mobile phones and spirits. So we still believe that the self -proclaimed master negotiator will actually need to prove that he can negotiate a trade deal.

However, we think that the earliest point in time when trade tensions can be reduced is June 28 when Xi and Trump might meet in Japan at the G20 summit.We still attach a probability of some 60-70% that trade tensions can be defused, but between then and now we think markets will remain very choppy.

This week-end we are also looking forward to the results of the European elections.We think that the elections will likely bring a considerable rise in the number of seats held by populists.That said, we think that the biggest market impact will likely come from what the elections mean for national politics.

For instance, we think a strong showing by the UK’s Brexit party - which would probably be accompanied by a perceived rise in the likelihood of a “no deal” Brexit- could present downside risks for UK yields and Sterling.We also note that Theresa May has just announced that she will be resigning soon, and this could lead to further uncertainty.

And should Italy’s current governing coalition remain intact following the elections, as we expect, we would look for another clash with EU officials over the Italian budget this fall.This will likely lead to renewed pressure on the spread between Italian bonds and German bonds which tends to be negative for risk assets in Europe.

So in summary we think that the next few weeks will remain choppy due to the trade worries and also Italian and UK politics.For the time being however, we remain more sanguine about the longer term view.