Market Update – 29/03/2018

It has been an extremely difficult week for equity markets, with the S&P500 testing the lows seen in early February. We also saw the Fed following through on the expected rate hike to increase to 1.75%.

The market falls have been seen across the board, though to varying degrees. The reason seems to be fears of a trade war with China as the US has placed additional sanctions on Chinese exports whilst providing exemptions for other trading parties such as the EU, Canada and Mexico.

The main fear is the potential for China’s retaliation. China has many ways to retaliate against the US, the biggest being through their currency. In August 2015 they allowed their Currency, the Chinese Renminbi (RMB) to fall which sparked a vicious market selloff that didn’t end until February 2016. China is a large holder of US Treasuries – they could easily dump these on market and watch the carnage ensue.

However, China seem to be playing this game much better than the US and have only sanctioned a small portion of imports, targeting Trump supporting industries. This makes them look like the relative ‘good guys’ in the context of world economics and geopolitics.

We think Stephen Roach, former non-executive chairman for Morgan Stanley in Asia put it best when he said “As America’s third-largest and most rapidly growing export market, and as the largest foreign owner of US Treasuries, China has more leverage over the US than Washington politicians care to admit.”

This week the US Treasury is set to auction one of – if not the – largest weekly auction of Treasuries on record. Given the Fed are attempting to reduce their balance sheet, the US is reliant on China to buy their bonds – seems like a strange time to pick a fight with your largest creditor.

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This update has been prepared by Innova Asset Management. Liberum Financial Pty Ltd and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306 trading as Fortnum Financial Advisers. The information contained within this post does not consider your personal circumstances and is of a general nature only. You should not act on it without first obtaining professional financial advice specific to your circumstances. This post and website holds information for Australian residents only.