Market news 2 August 2019

US

• In a surprise move, US President Trump announced additional 10% tariffs on $300bn worth of Chinese imports entering the US from 1 September, escalating trade tensions even further between the two superpowers. This represents the third round of US tariffs, with already 25% tariffs in place on $250bn worth of Chinese goods, and essentially covering all Chinese goods entering the US. The decision follows on the heels of US-China trade negotiations in Shanghai, which despite little progress being achieved, both sides regarded as “constructive”. The latest tariffs are likely to target a big share of consumer goods than previous rounds, with products including apparel and footwear, toys and mobile phones.
• As was widely expected, the US Federal Reserve cut policy rates by 25bps to 2-2.25%, in what was the first rate cut since the financial crisis. The controversial move to cut policy rates despite signs of a robust economy, came ahead of intense pressure by President Trump, and was justified based on “global developments for the economic outlook as well as muted inflationary pressures”.  Separately, non-farm payroll data showed that job creation in July was 164,000, in line with expectations. The unemployment rate remained steady at 3.7% and average hourly earnings picked up to +3.2% year on year.

UK

• In the UK, concerns over a hard Brexit became elevated with the appointment of pro-Brexit Prime Minister Boris Johnson. The exchange rate, which has become a barometer of investor concerns over a disruptive no-deal Brexit, fell against the dollar to $1.21, around multi-decade lows. Yet, complicating matters for the new Prime Minister, the government’s thin majority in the house of parliament was reduced to just one after losing a seat to the Liberal Democrats in a by-election.

Brazil

• The Brazilian Central Bank cut benchmark policy rates by 50bps to a new record low of 6%. The Copom (Monetary Policy Committee) acknowledged that the cyclical economic recovery had been weak, and that advances in the country’s generous pension system was underpinning lower rates. In its latest forecast, the IMF sharply revised downwards prospects for economic growth in Brazil to 0.8% from 2.1% in 2019.