What is clear to us is that if we if do not get a trade truce and hence if what we do get is an escalation of tariff warfare then global industrial production momentum which is already waning a little will take a leg downwards towards the lows that we saw in January. We think in such a case markets would follow.
As our favourite strategist sees it, the real obstacle to a US/China trade deal is the political need for both sides to maintain the myth of sovereign independence. For the Chinese to come back to the negotiating table they will need it to look like a sign of strength not capitulation. So, the G20 summit in late June will likely become a scramble to find a last-minute compromise on trade or find new policies to offset the negative effects of an escalating confidence shock on global growth.
Another point worth touching upon is the statement this week by Robert Mueller, the special counsel who investigated Russian interference in the 2016 US presidential election. Calling attention to the fact that his enquiry did not formally exonerate Trump from wrongdoing has given fresh urgency to the internal struggle within the Democratic party on whether to start impeachment proceedings against the US president. We do not have a strong view on whether such proceedings will go ahead or not but our view is that if they do go ahead then we will see more volatility in the markets not less.
The European elections did not throw up many surprises compared to the polls but in the case of the UK and Italy the effect on domestic politics will be interesting to watch.
In Italy Deputy Prime Minister Matteo Salvini has had his hand strengthened considerably due to the strong showing of his party, the Northern League. He is now pushing his coalition partners to back him on his quest to introduce a flat tax or risk seeing the coalition collapse which would most likely lead to new elections. In any case his plans will require a loosening of the budget and are likely to put Italy on a collision path with Brussels which could be negative for sentiment in Europe.
In the UK the Brexit Party – advocating a clean break for the UK, a so-called no deal Brexit - won resoundingly. This has made the Tory leadership race even more interesting but we still believe that there is only a small likelihood of a no deal Brexit, so we are still overweight sterling compared to our competitors.
So, although news this week has not been very good, we also do not want to get too bearish. Markets always climb a wall of worry and just imagine what would happen if the following three things were to occur in the next few months.
First a trade deal. Second a Fed cut in interest rates. Third US productivity data which was strong in the first quarter, could show further strength. If all those things happen markets would be off to the races.
As Keynes said - the expected never happens; it is the unexpected always.