DUBAI: The recent rally in US and other global equities has hit a speed bump, and could slow even further if trade talks worsen.
According to reports, $1.36 trillion of value was wiped off from global equity markets last week after US president tweeted on the breakdown of trade talks with China, threatening them of further hikes in import tariffs. On Friday, Trump hiked the import tariffs to 25 per cent from the earlier 10 per cent for $200 billion worth of Chinese goods. This threat also led to an emergency meeting between treasury secretary Steven Mnuchin with Chinese vice-premier Liu He to iron out the differences, triggering cautious optimism among investors on Friday.
Mnuchin indicated that bilateral talks were “constructive”, while Trump also reinforced those comments in a tweet.
“Do investors project their hopes that the two sides will continue talking until they find a solution? Possibly, but what could quickly turn the tables and drive stocks lower again would be China’s retaliation or — even worse — a decision to withdraw from the talks altogether,” Konstantinos Anthis, Head of Research at ADS Securities said.
The Dow Jones Industrial Average recovered 0.44 per cent on Friday to end at 25,942.37, after losing 2.12 per cent last week, the sharpest since March. The S&P 500 index also rose 0.37 per cent to end at 2,881.40, after losing 2.18 per cent last week. The Nasdaq Composite shed 3 per cent last week, the sharpest since mid-December. The indices had been on a one-way rally on the back of a growing US economy, and better than expected earnings and a dovish Federal Reserve.
“The uninterrupted 25 per cent rally since late December is an, not the norm, but it was the uptick in volatility last week that has naturally caused systematic strategies to pair risk as they were running at or near peak exposure. Indeed, this triggered large outflows from equity funds this week while robust inflows into bonds continued,” Stephen Innes, Managing Partner at SPI Asset Management said.
“The market consensus is still heavily biased towards a US-China trade deal, so if talks were to fall off the edge, then and only then would the market impact be tremendous. Markets have shrugged off the tariff announcement with little more than a stumble and investor optimism remain optimistic that the escalation will prove short-lived and be followed soon by a Trump-Xi agreement,” Innes said.
Surprisingly, gold prices remained subdued with minimal gains. International spot gold rose 0.4 per cent to be at $1,285.73 an ounce, after gaining 0.6 per cent in the week.
“It’s interesting to see that the yellow metal hasn’t really gained on the back of the elevated trade tensions, having climbed only $8 from its weekly lows. Does that indicate the investors are pricing in a resolution in the trade dispute soon? It remains to be seen but what’s certain is that a potential breakdown in talks between the US and China will reignite the demand for Gold and a break above the weekly $1,292 high points towards $1,302,” Anthis from ADS Securities said. Gold prices have shed 0.8 per cent since January 1.