stock exchange

The decision by the United States to increase the trade tariffs for China once again has brought the trade truce to a halt and fired up China’s tit-for-tat policy.

Financial markets seemed to digest positively the recent announcement from China of potential stimulus measures – such as tax cuts - in order to support its economy amid the release of recent weak Chinese economic data. Investors’ focus will be mainly on today’s result of the vote in the UK parliament on May’s Brexit deal as the future UK-EU relationship is uncertain

Financial markets remained in a cautious mood at the beginning of a week full of monetary policy meetings. The Fed is expected to raise interest rates in this week’s FOMC meeting (see preview), while investors will also be hanging on the outcome of other central banks’ meetings such as those of the Bank of Japan and the Bank of England.

Cautious mood in markets at the end of week, offsetting their improvement as fears over US-China trade relations eased with the announcement of potential tariff cut on US cars imported by China along with the release on bail of the Huawei CFO. However, the positive mood faded as disappointing economic data were released and due to the latest developments with Brexit

The mood in markets continued to improve amid the release of the Huawei CFO, coupled with comments from Trump announcing his intention to intervene in the case if necessary. China’s willingness to open its markets to foreign companies also weighed. However, the news announcing a vote of confidence on May, warrant the uncertainty. Tomorrow’s focus will be on the ECB meeting

Risk-off mood at the end of the week as increasing trade fears, volatility in oil prices and doubts about US economic growth weighed. The detention of a Chinese tech manager at the request of the US fuelled concerns about worsening relations. These events dispelled the positive mood after the G20 summit, in which China and the US reached a trade truce.

Following a bonanza year in 2017, this year looks like becoming a year of losses for emerging financial markets. Since the beginning of the year these countries’ currencies have depreciated on average by close to 13%, their stock exchanges have fallen by 10% and their risk premiums have increased by nearly 100 bp. Are we on the verge of a crisis in emerging markets?

The fall of the stock markets, after accumulating strong appreciations, is taking place in an environment of excessive complacency. Fears of accelerating inflation and more aggressive rate hikes were the initial trigger but were precipitated by the sharp uptick in volatility. Going forward, inflation expectations and the reaction of central banks will be key.