The US and China are both playing hardball, with neither wishing to lose face, but so far, there is no winning, only losing. On a topic that we have written extensively about in the past, trade wars continue to fluctuate between resolution and escalation. Following Trump’s announcement of further tariffs on Chinese goods last week, which initially, were planned to be implemented on 1st September 2019, China allowed its currency to devalue, falling through 7 Yen to 1 US Dollar. The tit for tat continued, with the US proclaiming China a currency manipulator. Trump later announced that he would defer some of his new tariffs, those specifically linked to consumer goods. China agreed to further talks within the next two weeks, in a move likely focussed at calming some of their tensions, as protests in Hong Kong escalated.
While stock markets responded positively to the softening stance of China, the same cannot be said of bond markets. Last week, we witnessed an event that has not been seen in over a decade; the event in question is the inversion of the US Treasury market’s yield curve. It has been over 10-years since the yield curve inverted; this means that the yield on 10-year notes fell below that of 2-year notes. The last time we witnessed this move was in 2007 and the Great Recession duly followed in December 2008. Despite the inversion being rather brief, historically, this has been a reliable precursor of a recession. But, bond markets, like equity markets, can get it wrong. However, we must be cognisant that the chances of recession have now greatly increased.