Global equity markets retreated in May as the US-China trade dispute escalated and signs of a near-term resolution faded.
In the US, the S&P 500 Index declined by 6.6% in May. In Europe, the Euro Stoxx 50 Index fell 6.7% while in Asia the Nikkei 225 Index lost 7.4%. Emerging markets, as represented by the MSCI Emerging Markets Index, declined 7.5% in May.
US President Donald Trump increased tariffs on $200 billion worth of Chinese goods from 10% to 25%. The hike came as repeated talks between US and Chinese negotiators failed to close on a deal aimed at ending a 10-month trade war between the world’s two largest economies. The US accused China of backing out of a deal that was taking shape, saying China reneged on an agreement to pass a wide range of reforms in Chinese law.
China responded with new tariffs of its own ranging from 5% to 25% on $60 billion worth of US goods. President Trump has vowed a hard-line on China and has said the US holds the upper hand, while Chinese media has vowed Beijing would stand strong. The hard-line tone from both sides added to the downside pressure as markets interpreted the rhetoric to mean drawn-out trade war.
Adding to tensions was an order, signed by Trump, that would ban telecom equipment from countries considered “foreign adversaries,” in a move apparently targeted at China’s Huawei Technologies.
Markets were dealt a final blow for the month after President Trump announced late Thursday, the 30th May, that the US would place tariffs on all Mexican imports in an attempt to pressure Mexico to stem the flow of migrants across the US border.
So where to next? President Trump is set to meet his Chinese counterpart, Xi Jinping, at this month’s G-20 summit in Japan, an encounter that could prove pivotal in the deepening clash over trade. There is certainly no upside for either country in a protracted trade war yet stubbornness on both sides could prove detrimental to securing a deal. Economists have warned that the existing tariffs would hurt US growth and the Chinese retaliation could even tip the US economy into recession. This would not help Trump as he seeks re-election in 2020.
With President Trump stealing headlines all month, markets didn’t give Brexit the airtime it deserved. Failure to make headway in securing an acceptable Brexit deal finally led Prime Minister Theresa May to announce that she is stepping down on June 7th.
Britain’s new prime minister will be whoever wins the Conservative party leadership race to replace her. The favourites, including former Foreign Secretary Boris Johnson, have vowed to leave the EU on Oct. 31 even if there is no deal in place. Most businesses and economists think that would cause economic turmoil and plunge Britain into recession.
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