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Trade tensions intensify

Financial markets in June were soured by the rapidly deteriorating trade relationship between the US and China. The IMF warned that the US’s aggressive trade strategy risked harming the global economy and trading system, and suggested that a trade war would result in “losers on both sides”. Elsewhere, pressure on the UK intensified to resolve Brexit and EC President Donald Tusk urged the UK to “lay the cards on the table”.

  • US interest rates rose by 0.25 percentage points
  • The ECB will conclude its programme of asset purchases at the end of this year
  • The possibility of an increase in UK base rate moved closer

Financial markets in June were soured by the rapidly deteriorating trade relationship between the US and China. The International Monetary Fund (IMF) warned that the US’s aggressive trade strategy risked harming the global economy and trading system, and suggested that a trade war would result in “losers on both sides”. During the month, China announced that it would impose levies of 25% on 545 US products worth a total of US$34 billion, and the EU announced a series of tariffs on £2.8 billion-worth of US products. Canada and Mexico also announced a range of levies. 

“The IMF warned that the US’s aggressive trade strategy risked harming the global economy”

The US Federal Reserve (Fed) raised its key interest rate during June by 0.25 percentage points to a range of 1.75% to 2%. This was the second increase so far this year; looking ahead, policymakers are predicted to raise rates again twice this year and three times next year. The tone of Fed officials shifted: previous wording stating that interest rates will remain “below levels expected to prevail in the longer run” was omitted this month. The Dow Jones Industrial Average Index fell by 0.6%.

The European Central Bank (ECB) confirmed that it will conclude its economic stimulus measures at the end of this year. Assuming the economic outlook remains positive, the central bank’s programme of bond purchases is set to halve from €30 billion per month to €15 billion per month, finishing at the end of December. Meanwhile, Germany’s economic outlook has deteriorated, according to the Ifo Institute. The Dax Index fell by 2.4% over the month, while the CAC 40 Index fell by 1.4%.

Pressure on the UK intensified to resolve Brexit. European Council President Donald Tusk urged the UK to “lay the cards on the table”, cautioning that the most difficult issues remain unresolved and progress is vital in order for both sides to reach agreement by October. Bank of England (BoE) Governor Mark Carney highlighted the UK’s “rock solid solution” to a “disorderly Brexit” but said he was still awaiting Europe’s input, warning the issue could not be resolved by the private sector. Although BoE policymakers left base rate unchanged at their June meeting, the likelihood of an increase at their August meeting has increased. Three members of the nine-strong Monetary Policy Committee (MPC) voted to raise rates from 0.5% to 0.75%. The FTSE 100 Index fell by 0.5% during June.

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