Investment Insights: Trade winds weaken

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

While U.S. and Chinese trade relations sour, concerns about other U.S. trade partners have grown, as officials attempt to shore up agreements with Canada and Mexico, and the European Union.

Stocks are mostly lower in May, with choppy trading over the past few weeks; the S&P 500 is up 0.3% in the past five trading days. The benchmark 10-year Treasury yield declined to a low of 2.37% last week, but has since rebounded.

The gauge has fallen most of this year and saw a sharper drop in recent weeks over U.S.-China worries. As expected, geopolitical risks continue to menace financial markets.

The White House broadened its view and shifted its focus to tariffs affecting a number of other trading partners. Stocks rose after President Donald Trump announced the U.S. would delay European auto tariffs by up to six months. This announcement had been made to curb retaliatory action by Europe after the U.S. imposed tariffs on steel and aluminum imports on its trading partners last year.

The same 25% steel tariffs were lifted from Canada and Mexico on Friday as a concession to lawmakers to pass the United States-Mexico-Canada Agreement (USMCA) at the congressional level. While the USMCA, which would replace the North American Free Trade Agreement (NAFTA), has been formalized and signed by the leaders of each country, it must also be ratified in order to be put into effect. Trump commented that he would not provide the same provision to China.

Trade tensions between the U.S. and China continue to simmer after U.S. representatives stepped away from the negotiation table after China removed key assurances within the trade agreement. For now, it seems talks have paused until President Trump and China’s President Xi Jinping meet at the G20 summit on June 28-29. A pause in talks does not mean a pause in action for either side.

Alongside the threats of a new round of tariffs, the U.S. administration added Huawei Technologies, a China-based telecom equipment company that has been accused of spying for the Chinese government, to the trade blacklist last week, citing national security concerns. Under the restrictions, Huawei is unable to buy U.S. technology without special approval, and the use of its products in U.S. telecom networks is also prohibited. However, the U.S. Commerce Department on Monday announced it will postpone the restrictions for 90 days in order to give U.S. companies time to source other suppliers.

The Global Investment Management team sees less opportunity in stocks because of geopolitical uncertainty stemming from international trade and Brexit. Given evident below-trend economic growth and a further tempering in company earnings, we have become more concerned with the state of equity markets. While we expect higher volatility over the short to medium term, our strategies remain slightly overweight to stocks based on our risk-adjusted expectations and our outlook for other asset classes like bonds and alternatives.

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