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Escalating trade tensions

May 2018

The prospect of global trade wars moved closer during May. The US announced that it would start imposing tariffs on steel and aluminium imports from the EU, Canada and Mexico, and also on Chinese goods. Fed policymakers expressed concern, warning of possible harm to business sentiment and spending. 

  • The US economy grew by 2.2% YoY in Q1
  • Technology stocks performed strongly in May
  • Congress voted in favour of easing stringent banking regulations

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


The prospect of global trade wars moved closer during May as the US announced that it would start imposing tariffs of 25% on steel and 10% on aluminium imports from the EU, Canada and Mexico. The levies had been announced in March and subsequently postponed pending a review, but will now take effect from 1 June. Meanwhile, in the middle of the month, the US and China initially appeared to be reaching an accord over trade, allaying fears of a possible trade war between the two nations. As May drew to a close, however, the White House backtracked, saying that it was ready to press ahead with tariffs. China described the move as “obviously contrary to the consensus reached between China and the US in Washington not long ago”, and urged the US to “act in the spirits of the joint statement”.

“The prospect of global trade wars moved closer during May”

Federal Reserve (Fed) policymakers had already voiced concerns over escalating trade tensions, warning of possible harm to business sentiment and spending. Looking ahead, the Federal Open Market Committee (FOMC) believes that the range of possible outcomes for the country’s economy and inflationary backdrop are likely to be “particularly wide”, and will depend on the response of US trading partners. 

The technology sector performed particularly strongly during the month, followed by industrials and energy. In contrast, telecommunications services, consumer staples, utilities and financials ended the month in negative territory. Over May as a whole, the Dow Jones Industrial Average Index rose by 1%, the S&P 500 Index climbed by 2.2%, and the Nasdaq Index rose by 5.3%. 

The US economy expanded at an annualised rate of 2.2% during the first quarter of 2018, compared with an earlier growth estimate of 2.3% that was trimmed by weaker-than-expected investment and export activity. The economy grew by 2.9% during the final three months of 2017. The FOMC held its key federal funds rate at 1.5%-1.75% at its May meeting, but a more sanguine tone about inflation, underpinned by a strong labour market, has helped to fuel expectations of another increase in the near future. 

The House of Representatives voted by 258 to 159 in favour of easing stringent Dodd-Frank banking regulations imposed in the wake of the financial crisis. Regulators began to relax the Volcker rule on risk-taking by banks, which is now regarded as too complicated and draconian.


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