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Macroeconomic Trade and Bonds

May 22, 2018

 

The market responded positively to President Trump’s comments on Chinese ZTE Corp. Investors see the comments as a sign for easing U.S-China trade tensions. The president made a statement that he would help ZTE get “back into business fast", saying too many jobs in China were at risk. With concerns the high-level trade talks between the countries to resume with a potentially stronger tone after a tough stance on trade and tariffs, the chance of a potential trade war is being priced lower. Should negotiations break down, tariffs on tens of billions of dollars of products could appear before the end of next earnings season, with impact on earnings delayed but financial markets certainly instantaneous.

 

Market noise should now increasingly be derived from real economic activity and experience less volatility from overtones of tariffs. Equity holders are now looking towards earnings seasons for changes in their portfolios.

 

Macroeconomically, the government bond prices and the U.S. dollar fell, with the yield of 10-year U.S. Treasury note rising from 2.97% to 2.99%. After Friday, where the spread between US government bonds and the German Bund was the widest in roughly three decades, investors remain confident in economic growth in the US over that of Europe. Whether this trend of investor confidence will continue will remain to be seen. After all, the development of ultralow and in some instances negative rates in Europe could be increasing the appeal of US Treasury to foreign investors.

 

Keith Knutsson of Integrale Advisors commented, “Investors should remember that the economic fundamentals in the United States remain superb at the moment.”

 

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