Did Trump just blink?
Over the past few weeks, fundamentals have not been as dominant a market driver as politics, the trade war, geopolitical concerns and migration/the EU summit. Over the past week, we have received further indication of what Donald Trump's reaction function might entail on the trade war/protectionism agenda: (1) a correction in equity markets and/or (2) a deterioration of his support in opinion polls. On Monday, we recorded another marked fall in the US equity Dow Jones Index, which has overall corrected around 5% over the past two weeks. On Monday, the Dow Jones Index moved below the important sentiment threshold of the 200-day moving average, which has not happened in the past two years. Indeed, the Dow Jones Index is below the 50-day, 100-day and 200-day moving average, which shows the momentum of the equity markets. Since Monday, we have seen Trump backtracking on some of his harsher stances, such as his decision to use existing laws to screen Chinese investments rather than employing the International Emergency Economic Powers Act of 1977, which would give him broad authority to curb Chinese investments. We still believe that the already-announced tariffs will be implemented next Friday (6 July) and, at the same time that Trump will announce tariffs on another USD200bn of Chinese imports.
Decisive for Europe and Merkel
The EU summit yesterday and today is important for not only the migration debate and deepening of the EMU agenda. Angela Merkel's coalition partner CSU has given her an ultimatum, which runs until this weekend, to find a solution on the migration issues in southern Germany. We believe a de-escalation of the German government crisis is the base case but, looking ahead, we should not underestimate the risk of a breaking apart of the German government and toppling of Merkel over coming months. Should she be replaced by a more hard-line/conservative candidate, it could have grave repercussions for the stability and resilience of the EU and bring the European political risk premium back to markets. The migration issue is particularly important for CSU to draw a firm line ahead of the October Bavaria elections against its main rival AfD.
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