Global Weekly: From trade war to tech war?

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Equity markets had a rough start to the week. All markets went down on Monday, just after the Trump administration initiated further measures against Huawei and put the Chinese telecom company on the blacklist. US companies may no longer do business with Huawei, as that is deemed “a risk” for national security.

Semiconductor manufacturers are the most exposed to this ban, due to their integrated value chains and strong dependence on the Chinese market. For example, Infineon announced over the weekend that it will not sell chips produced in the US to Huawei anymore. Moreover, communications heavyweight Alphabet will also no longer provide services to Huawei, including the operating system Android and applications such as Gmail, YouTube and Chrome.

On Monday night, the Trump administration announced a 90-day grace period before sanctions will be imposed. This helped to ease the pressure on equity markets and let them rebound on Tuesday. Chip producers profited the most of the risk appetite, after they sold off on Monday.

Sentiment turned negative again on Wednesday, however, when US Trade Secretary Mnuchin confirmed that a trip to Beijing, China, to restart trade negotiations has not been set yet.

Bonds: Fed in wait-and-see mode

Last Wednesday, the minutes of the April/May Fed policy meeting were released. The minutes continued to emphasize patience in the policy outlook. As such, we can conclude that the Federal Reserve is in a wait-and-see mode.

The Fed minutes expressed that growth was “solid,” but noted moderation in household spending. We left our Fed outlook unchanged, with the expectation of one interest rate hike at the end of 2020. On the risk side, the minutes expressed incremental concern about corporate debt levels.

This week, markets are essentially backwards-looking, now that trade tensions have re-escalated. Surveys will now increasingly try to determine the extent to which recent developments are starting to feed into corporate uncertainty. Is not clear, though, whether there is enough time for this to be reflected in the upcoming May surveys.

Emerging-market fixed income markets have not seen a sharp reaction so far. Some weakness was already seen in local emerging markets before the trade talks turnaround, due to factors that echo themes from the second quarter of 2018, such as some weaknesses in specific emerging countries and a stronger US dollar. The dollar strengthened on the outperforming US growth compared to rest of the world. We have sold our local-currency exposure much earlier and allocated it towards hard-currency emerging-markets bonds, both sovereign and corporate bonds. Emerging-markets bonds show somewhat more resilience compared to high-yield credits.

10-year German Bunds are trading around -0.1% and could move sideways. The re-escalation of the US-China trade frictions initially brought risk spreads wider, but spreads have stabilized quickly thereafter. While risky markets have weakened somewhat, they are coming from their best levels of the year, following a substantial rally. Our risk-reward assessment is more balanced, given the still-positive macro momentum and the more supportive stance of central banks. As such, we do not expect a break yet. 10-year US Treasuries were in the mood to test their low of 2.368%. This technical yield level is quite strong. A strong risk-off market mood is needed to break this level and to subsequently approach the low of 2.30% in September 2017.

After their first-quarter earnings releases, corporates within the investment grade space (BBB and higher rated companies) showed a mild weakening of their balance sheet. The more leveraged sectors (consumer, health care and telecom, media and technology - TMT), however, showed steadier results, with for example relatively stable interest coverage.