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August: an eventful month for financial markets

Usually the month of August is one whereby market participants tend to take days off and have a deserved break. That said, given the recent volatility market participants are on their tiptoes as to how markets will react to the ongoing political uncertainties.

It seems that August 2018 will be a busy month when compared to comparable periods, primarily due to the recent headlines, which among others hit the Chinese yuan, Brexit talks which seem to have no firm pace, the Nafta negotiations and the possible worsening tit-for-tat trade war between China and the United States.

The yuan over the past weeks fell considerably and despite its slight rebound over the past days, on a year-to-date basis the currency is still down circa 4.5 per cent versus the dollar. The prime contributors for the recent decline is the PBOC which has cut rates multiple times, while the other major concern is the sustainable path of economic growth.

Many believe that the relatively high mid-digit growth figure will succumb to pressure. The latter is surely a preposition that the Chinese government is taking seriously and in fact, last week it committed itself with pro-growth measures going forward, among which were higher government spending and easier credit.

That said, given the ongoing trade saga, China might maintain a weak currency for the time being to mitigate the imposition of tariffs. My personal view is that over the longer term China should continue to maintain the level of growth given domestic demand, which should improve going forward supported by an expansion within the middle-class.

Brexit talks should resume in Brussels in mid-August. Many fear that the UK will leave the Union without any deal. In fact this sentiment was being advocated by many MPs with the UK international Trade Secretary Liam Fox admitting that there is a high probability they will be out without a good deal. Such disruption is already being factored in the UK financial markets with sterling lately hitting lows as uncertainty prevailed. HSBC is already reportedly shifting out some of its units elsewhere in the EU.

The NAFTA agreement is also on investors’ mind. Prior to his victory, the newly elected Mexican President seemed to have a harsher stance with regards to the US. Following victory, he toned down the rhetoric and despite the May 2018 deadline was blown through, recently we have seen a resurgence with news hitting the headlines that Mexico and the US are closing on to an agreement. That said, it’s a waiting game given that Canada seems to have been excluded from such talks.

In my view, ultimately the agreement is crucial for all parties involved and in the coming months we should see a new agreement that suits all parties involved.
Despite the aforementioned issues, in reality what’s making most noise is the worsening US-China trade situation. On Wednesday, China imposed new tariffs on $16 billion worth of US goods - clearly a sign that the world’s second largest economy is not backing down.

In this regard, the recently announced pro-growth measures are a clear sign to counter attack the tariffs imposed on China by the US. It’s clearly a tit-for-tat that will negatively impact China in the short-term but should be beneficial over the longer term. Let’s be blunt: China has more tools to manoeuvre its policies, both fiscal and monetary.

Clearly August is a busy month that will condition market movements. As I and my colleagues opined in recent writings, patience is crucial. Political uncertainty does create market noise, but the recent movements might have been an over-reaction. We are of the view that over the longer term we will sail towards calmer waters. So current valuations might be attractive.

Disclaimer:

This article was issued by Jordan Portelli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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