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Trade tensions with China increasing

Equities endured a difficult month. The prospect of an imminent trade deal between the US and China was shattered by a Presidential tweet that dramatically reset expectations. Not only are trade tensions with China increasing, but these are now metastasizing across geographies and industries. Understandably, investors are concerned that this may result in a series of negative feedback loops that tip the global economy into recession. UK assets were particularly impacted as the probability of a ‘hard Brexit’ increased.

The prospect of prolonged trade tensions, alongside a US economy that is beginning to slow as the benefits of last year’s tax cuts fade, has led to intense speculation that the next move in US rates is downwards. This could occur as early as this month. Should trade tensions persist, then a precautionary rate-cut is likely. However, the Fed is likely to stand pat in the short-term as it awaits evidence on the extent of the US slowdown. Hopes of an interest rate cut have enabled markets to recently recover some of their poise. If the Federal Reserve faces a dilemma, the ECB faces an altogether more difficult task. Monetary policy is already at the lower bound and a slowdown in trade has a disproportionate impact on its export-led economy.