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Trade wars, rate rises, profit warnings ... is it all about to kick-off?

Published: 23:37 19 Jun 2018 AEST

Nervous
Is it time to be afraid?

Never mind “sell in May and go away”, is it time to consider “sell in 2018 and vegetate”?

Global stock market indices are reasonably adjacent to all-time highs but the recent mood music has been on the discordant side.

In the US, markets quickly overcame concerns about Donald Trump’s “shoot first, think later” style of leadership when he delivered on pledges to cut taxes but there are now signs that investors are getting nervous over the president's desire for a trade war with China, Europe and, once Elon Musk and Jeff Bezos have colonised them, the moon and Mars as well.

Last week, the US imposed tariffs on US$50bn worth of Chinese goods, and predictably China responded in kind. Trump has already threatened to fight back against China’s retaliation. He might want to research the feud between the Hatfields and the McCoys sometime, though it is doubtful the ins and outs of the decade-long blood feud could be compressed into the 280 characters length of message Trump prefers.

A trade war is a lose-lose situation

“Despite the President’s protestations to the contrary, history suggests that no-one wins a trade war,” stated Russ Mould, the investment director of AJ Bell.

“Unfortunately it now looks like March’s initial spat over steel and aluminium was just the beginning and not the end of the dispute, so investors will need to keep a watchful eye on events,” Mould cautioned.

Since the credit crunch in the previous decade, investors have enjoyed an unprecedented run of historically low interest rates but now there are signs that central bank chiefs are preparing to take the punch bowl away.

In the US, the Federal Reserve is reducing quantitative easing (QE) – printing money to buy bonds from investment institutions in order to provide them with added liquidity – and has increased interest rates twice this year, with a couple more expected before the year is out.

Meanwhile, the European Central Bank has indicated it would continue to taper off its QE programme before ending it altogether in December but it has done its bit to keep the party going a bit longer by delaying interest rate rises until next year.

Profit warnings on the rise in the UK

In the UK, profit warnings seem to be coming thicker and faster. Today, we’ve had a red flag raised by retirement homes builder McCarthy & Stone PLC (LON:MCS) and what looks like a white flag raised by department stores group Debenhams PLC (LON:DEB).

Further down the retail food chain Footasylum PLC (LON:FOOT), the fashion retailer, upset the market with its trading update, prompting the shares to halve.

Pretty much the whole of the old bricks & mortar retail sector is having hard times, although the grocers, whose product lines fall less under the discretionary spend category, are doing OK as inflation picks up and adds a more flattering sheen to the top-line.

The gravy train also appears to have hit the buffers for a number of other sectors; for instance, outsourcing groups, which have made out like bandits since Margaret Thatcher’s heyday, have found themselves operating in a much more cut-throat environment this decade.

Even the housebuilders, who were given a massive leg-up by the government’s “Help to Buy” initiative (dubbed “Help to Sell” by some wags), might be at the fag-end of the current boom.

The US has its tech giants to keep the stock market surge going but Britain’s tech leaders, now that we’ve sold the family silver that was ARM Holdings, are also-rans on the world stage, which leaves the market somewhat dependent on the fortunes of the financial services industry – and we all know how well that worked out in 2008.

If the bull run is truly about to end no one seems to have told the gold market.

If it ain’t safe, it ain’t a haven

Traditionally a haven – or safe haven if you are tautologically inclined – for risk-averse investors, the yellow metal is currently not attracting much interest, with the most actively traded futures contract down from US$1,330.50 at the start of the year to US$1,277.20 presently.

To an extent, demand for gold has been constrained by the strength of the US dollar, but that could change.

“So far, the trade war has been confined to trade. The fear, however, is that it may spill over into the financial world,” commented Marshall Gittler, of ACLS Global.

“Specifically, China could start selling off some of its massive holdings of Treasury bonds. The country owns some US$1.18tn of Treasuries, or 30% of all foreign official holdings of Treasuries, which is not to mention their holdings of agency bonds and others,” Gittler added.

Ken Odeluga, of spread betting firm City Index, suggests it might be worth nervous investors keeping an eye on the VIX Market Volatility Index, known colloquially as ‘the fear index’.

“If the VIX Market Volatility Index really has been relegated to the status risk-off proxy of last resort, it’s done its job so far this week, with VIX futures posting their biggest intraday move so far this month. The rise was a modest 14.4 points at most on Monday, but both the underlying volatility gauge and futures contracts have already surpassed yesterday’s highs,” Odeluga said.

“Anxiety might still be contained, but now, there’s no doubt nerves are increasing. The watch is on for sharp slides in algo-related [algorithm-related] liquidity that typically accompany pronounced market gyrations nowadays,” he added.

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