Despite a bit of volatility around the US tariff issue and the Italian election, share markets bounced back over the last 10 days as it all turned out a bit better than expected, North Korea’s Kim Jong Un and President Trump agreed to meet and data in the US did not disappoint. The US February payrolls showed stronger than expected jobs growth and weaker than expected wages growth.

Bond yields moved slightly upwards in the US, UK, Italy and Spain but fell a bit in Germany and Japan. Oil and copper prices rose, but iron ore fell aggressively. While the US dollar surprisingly remained unchanged.

The January US payroll report released in early February that showed an acceleration in wages kicked off rising Fed fears, surging bond yields and a sharp correction in equity markets. We have also seen fears of a global trade war and Gary Cohn resigning.

A few weeks later and the US is back to a Goldilocks trend, the tariffs are less severe, and Kim Jong Un and Trump are to meet. Still, more volatility is expected this year as many of the issues that have plagued markets this year have further to run. Nevertheless, the broad trend in shares likely remains up supported by good earnings, cash rich companies and an economic recovery.

The noise and fear around the global economy and financial markets initially ramped up another notch following a messy election outcome in Italy and news that Trump’s rational chief economic adviser Gary Cohn was resigning, thus, adding to fears of a trade war.

Of course, this is not the end of the matter as Trump has warned of more tariffs coming. China looks like it’s being a key focus of this given a US review of China’s alleged theft of US intellectual property and a request that China cut its trade surplus with the US. So, while there may not be a full-on trade war yet, there may be no peace on the trade front either.

Also, the messy Italian election outcome is not great for Italy, but it’s unlikely to threaten the euro. Basically, there are now three major blocs in the Italian lower house: the right wing coalition dominated by the far right Northern League; the Five Star Movement; and the centre left dominated by the Democratic Party. None of these blocs have anything near a majority and after parliament first sits on March 23, it could take months to resolve - and may require a new election.

Barring a worst-case scenario coalition between Five Star and the Northern League which, given their huge political differences, is unlikely, it will be the Democratic Party that will decide who forms government and given its pro-euro and left of centre bias its more likely to lean in the direction of 5SM; probably on condition that it remains supportive of Italy remaining in the euro.

So while the final outcome may not be great for Italy in terms of keeping the budget under control and reforming the economy, there is unlikely to be a short-term threat to the euro. Five Star is no longer advocating an exit from the euro and the Northern League has backed away from it too. This and the German Social Democrat Party’s solid support for a coalition with Angela Merkel leaves Germany on track to work with France on strengthening the eurozone.

Finally some good news; Trump is to meet Kim Jong Un before May. Whether it comes to anything remains to be seen, but there have been false thaws in North Korea’s relationship with South Korea and the US several times over the decades.

(Sources: Bloomberg, FinSec)

Disclaimer:
This article was issued by Antoine Briffa, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is 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.