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General Market Update

Authors: Phillip Feng Co-VP Education/ Research, Edward Su Co-VP Education/ Research, Jenny Chen Research Analyst, Bill Shu Research Analyst

All amounts in US$ unless otherwise stated.

The U.S.-China Trade War

Increasing nervousness amongst investors:

As the tit-for-tat trade war has rapidly escalated with no signs of resolution being reached.

  • During the past 2 weeks, U.S. raised tariffs on ~$200bn worth of Chinese imports and threatened to raise tariffs on an additional $300bn; China responded with its own retaliatory tariffs.

U.S. blacklisted Huawei (China’s leading telecommunications company) from buying American technology and components. Huawei is reliant on U.S. suppliers for parts as it sources components from 22 suppliers listed in the U.S.

  • Why is Huawei blacklisted? U.S. Department of Justice has accused Huawei of attempting to steal trade secrets, wire fraud, and obstruction of justice.

  • Implications for China? Restrictions on technology will slow growth for China. U.S. investment and partnership restrictions would change existing company’s supply chains.

  • Who is impacted? Any company caught in the crossfires of the trade war is impacted with poor economic relations between U.S. and China. Tariffs will reduce the bottom line for companies, impacting the prices of end goods to consumers.

Interest rates

Federal Reserve announced during the April 30-May 1 meeting their intentions of keeping interest rates unchanged.

Trump wanted FED to lower interest rates to stimulate the economy; FED is comfortable with the patient stance on interest rates given the environment of moderate economic growth and muted inflation pressures.

Yield Curve

The yield curve between the 3 month vs. the 10 year U.S. treasuries has flickered the past week, inverting a few times but bouncing back above 0.

The 3 month and 10 year yield curve is widely used as a “Recession indicator”. Although it is not the main predictor of recessions, it has inverted before every U.S. recession in the past 50 years.

  • Why? An inversion means the 10 year yield is lower than the current yield. Lower interest rates occur if the Federal Reserve cuts rates, and the rate cut is done when the economy is struggling to stimulate it.

Brexit/British Pound

After Conservative opposition to her latest Brexit deal (with a promise on a second referendum), Theresa May will leave office on June 7, after 3 years of repeated and failed delivery of Brexit, leaving the country and her party more divided than three years ago.

In May 2019, Brexit turmoil has caused the British Pound to decline to near its lowest level in the year due to anticipation of economic slowdown and uncertainty.

The market saw a slight recovery in the pounds sterling after May’s resignation, yet this gain is likely to be short-lived as more uncertainty will arise with the Brexit negotiations between EU and the new PM (a popular guess is Boris Johnson).

Both the Conservative and Labour parties remain divided on the Brexit approach and significant uncertainty will remain until the new PM and his/her stance on Brexit become clear.

Oil Markets

On May 23, WTI Crude Oil plunged by nearly 5.7% to the lowest level in almost 2 months, amid increasing tensions between the U.S. and Canada.

  • Meanwhile, the energy-intensive manufacturing industry in Japan and the European Union are both showing weakness and worse-than-expected economic data in May.

  • Despite some minor recoup on Friday, this recent price plunge indicates a downward momentum on oil price due to worsened expectations on energy demand.

What will OPEC do?

  • In the majority of 2019, oil prices have been rising due to supply losses from Iran and Venezuela as well as OPEC’s caps on oil production, yet the U.S. has been consistently increasing its oil production and inventory to maintain a lower level of oil prices. The OPEC cuts are now set to expire at the end of June.

  • With more uncertainties on the demand side, it is becoming increasingly likely that OPEC will maintain its oil production cuts until the end of the year.

The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the authors, which do not necessarily correspond to the opinions of University of Waterloo Finance Association (“UWFA”). Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by UWFA. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.