The Week Ahead

  • Trump likely to turn his tariff attention to Europe shortly

    The S&P 500 closed at record highs last Wed after US Federal Reserve (“The Fed”) chairman Jerome Powell warned Congress of continuing uncertainties in the US economy. This boosted investor speculation that the Fed will cut interest rates at month end. The S&P 500 500 rose by 0.8% to briefly cross the psychologically-important 3 000 point level for the first time, before succumbing to profit-taking to close 0.5% higher. While the US equity market has been driven largely by Fed policy rate expectations for ages, the strong employment numbers of the previous week dented those expectations somewhat. Following Powell’s remarks, bond and equity prices remained elevated and the US dollar weakened in response to likely lower interest rates. The US yield curve became less inverted, as 3-month yields fell and 10-year yields rose. Overall, Powell’s tone was far more dovish than expected, making a rate cut on 31 July all but certain.

    The US equity bull market has been going for over ten years now and whichever way one looks at it, it can only be described as “late cycle”. In other words, given its longevity-the longest in history-by definition it must be at or near an inflection point. At this stage, the main positive factor underpinning a further rise in markets remains the potential for more interest rate cuts and perhaps a return to some form of quantitative easing in Europe under new European Central Bank (ECB) governor Christine Lagarde. But neither of these factors offer any longer term, sustainable underpin to equity markets, so the watchword continues to be cautious.

    The White House is considering applying trade tariffs on the EU and especially on German motor vehicle exports into the US. Estimates are circulating that these tariffs could be as high as 25% and could have a value of around $41 billion. If indeed such tariffs are applied, the German automotive industry would be hit hard and there could be repercussions in the German economy, which is already flirting with recession. Exports currently comprise 47% of Germany’s GDP and the European Union (EU) is the world’s largest car exporter. Thus both Germany and the EU are particularly vulnerable to the application of US automotive tariffs.

    The UK’s ambassador to the US, career diplomat Sir Kim Darroch, resigned last week in the wake of a leak of politically-sensitive confidential cables that highlighted Darroch’s disdain for US President Donald Trump. The notoriously thin-skinned Trump reacted in predictable fashion, effectively demanding that Darroch be replaced. Darroch’s position became increasingly untenable and he fell on his sword when it became clear that Boris Johnson, the likely replacement for Theresa May as British prime minister later this month, would not back him over the incident.

    This has resulted in accusations that Boris Johnson will accede to Donald Trump’s every wish if and when he takes over as prime minister. Coupled With the likelihood of the UK’s economy contracting slightly in Q2 amid a slew of poor economic data, sterling continues to decline against the Euro and the USD.

    The JSE All Share Index (Alsi) closed 0.5% down at 57 277 for the week. SA Reserve Bank (SARB) governor Lesetja Kganyago was re-appointed for a further 5-year term of office and this was met with universal acclaim by the local and global financial markets. The SARB’s Monetary Policy Committee (MPC) meets this week to debate interest rates, with the consensus view being a 25 basis point cut in the repo rate.


    Economic events

    17 Jul                                                              SA Retail Sales May

    18 Jul                                                              SARB/MPC Repo rate decision-expect a 25bp cut