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Trade wars on the horizon

May 2018

Corporate news took a back seat during May as political developments directed investor sentiment. The possibility of an international trade war moved closer during the month as the US pressed ahead with tariffs on Chinese goods. The US also imposed tariffs on steel and aluminium imports from the EU, Canada and Mexico.

  • A coalition government was finally formed in Italy
  • The Bank of England warned that Brexit is damaging the UK economy
  • Japan’s economy contracted in the first quarter

To view the series of market updates through May, click here


Corporate news took a back seat during May as political developments directed investor sentiment. The possibility of an international trade war moved closer during the month as US President Donald Trump announced that he was ready to press ahead with tariffs on Chinese goods. China described itself as “surprised and unsurprised” by the decision. The US also announced tariffs of 25% on steel and 10% on aluminium imports from the EU, Canada and Mexico from 1 June. The tariffs affect EU exports worth €6.4 billion in 2017, and the news triggered fresh worries over the impact of trade wars. European Commission President Jean-Claude Juncker commented: “This is protectionism, pure and simple”. 

“Europe was blighted by political instability in Italy during May”

Europe was blighted by political instability in Italy during May. Attempts to form a coalition government continued to fail following a General Election in early March. At the end of May, however, the situation was finally resolved and Giuseppe Conte was announced as the new Prime Minister. The uncertainty took its toll, however: the benchmark FTSE MIB Index dropped by 9.2% over the month, France’s CAC 40 Index fell by 2.2%, and Germany’s Dax Index ended May 0.1% lower. Meanwhile, the eurozone’s quarterly rate of economic growth slowed from 0.7% during the final quarter of 2017 to 0.4% in the first three months of 2018. The eurozone’s annualised rate of inflation is expected to have risen from 1.2% in April to 1.9% in May,

A lack of progress on Brexit legislation continued to blight sentiment in the UK. Bank of England Governor Mark Carney warned that Brexit negotiations were entering “a critical phase”. The central bank believes that Brexit has hurt the UK economy, calculating that household income is 4% lower than policymakers’ pre-Brexit calculations. The FTSE 100 Index rose by 2.2% over May as a whole. 

Japan’s economy shrank at an annualised rate of 0.6% during the first three months of 2018, dampened in part by a slowdown in domestic consumption. The Nikkei 225 Index fell by 1.2% over the month. Elsewhere, Australia’s annual Budget included tax reductions for those on low and middle incomes, and measures intended to return the economy to a surplus in 2019-20. Australia is one of only ten countries in the world to hold an “AAA” credit rating from all three credit agencies. The ASX All Ordinaries Index rose by 0.9% during May.  


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