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Cross-Asset Quarterly Outlook

June 2019*

Trade, the Fed and the Slowdown

Despite the pivot in the Fed’s monetary stance which drove risk assets to new heights in Q2, markets turned decidedly negative following a peak in April. This reflected several factors, chief amongst them the darkened outlook for the trade relations the US seeks to pursue with the rest of the world. Not only have negotiations not made any progress, but the target zone of countries in focus kept widening as well. In May, the US administration announced it would raise tariffs on $200 bn worth of Chinese imports from 10% to 25% arguing that insufficient progress had been made on negotiations. In turn, China retaliated with new tariff increases on $60 bn of US goods, a probe into FedEx and signalled that it would restrict the flow of rare earths to the US. President Trump further ratcheted up the pressure with attacks on telecom company Huawei and on countries dealing with it. He also reiterated threats to impose tariffs on European car imports and announced that India would face the end of its favourable tariff status with the US. But the most shocking event for the market was the announcement that the administration would impose a 5% tariff on all imports from Mexico (rising in monthly steps to 25% by October) if Mexico did not restrict the flow of immigrants more forcefully. This came despite the recent conclusion of the USMCA, the agreement that is intended to replace NAFTA but is not ratified by Congress yet. This flare-up has since been defused, but it illustrates the fickle and unpredictable nature of the administration’s position on trade and other issues (the latest to make it onto President Trump’s list of ire is French wine).

Chart 1: US Real GDP During Recoveries

Source: Federal Reserve Bank of St. Louis

*The publication reflects asset performance up to May 31, 2019, and macro events and data releases up to June 12, 2019, unless indicated otherwise.

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The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.

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All rights reserved.

City of London Investment Management Company Limited is authorised and regulated for the conduct of investment business within the UK by the Financial Conduct Authority (FCA), registered as an Investment Advisor with the United States Securities and Exchange Commission (SEC) and regulated by the Dubai Financial Services Authority (DFSA).
Registered in England and Wales No. 2851236.   Registered Office: 77 Gracechurch Street, London, EC3V 0AS, England.

© 2019 City of London Investment Group PLC. All rights reserved.