Escalating trade war

For the month as a whole, the US S&P 500 Index fell by 6.4 per cent measured in USD, while the European Stoxx 600 Index dropped by 4.8 per cent measured in EUR and the Nordic VINX Index ended the month down 5.4 per cent measured in NOK. Here in Norway, investors on the Oslo Stock Exchange (OSEBX) had to cope with a downturn of 3.3 per cent.

King of Twitter

A surprising tweet about increased customs tariffs on Chinese imports, which thus signalled a breakdown in the negotiations, started the decline in May. The tweet was then followed by threats of increased customs tariffs on all Mexican goods unless the authorities stops the illegal immigration to the USA. Mexico is the USA's third-largest trading partner after China and Canada. The sum of escalating trade wars, worsening growth prospects and not stable enough macro figures put an effective damper on a lot of investors' risk appetite.

USA and China

As usual, the USA is fighting on several fronts. The relationship between the USA and Mexico is an important one. At the same time, the trade war between the USA and China is even more important for global growth prospects. Economists trying to calculate the worst-case effect have often arrived at a negative effect on GDP of around 1 percentage point for China and up to 0.5 percentage points for the USA. In a situation where the macro impetus is still weak, this is not a desirable scenario. The escalation in the trade war has sharpened the rhetoric, especially in China, where symbols like "the long march" are being used to warn of short-term pain to achieve long-term gain. The fact that the USA has drawn Huawei into the trade war has not made the situation any better.

Trade or technology?

Attempts have been made to keep the trade war and the just-as-relevant technology war separate for a long time. However, last month's developments which led to the USA blacklisting Huawei as a direct consequence of the breakdown in negotiations has resulted in these two wars melting together. The fact that Chinese technology companies are now breathing down the necks of US companies means that many people are now talking about a Sputnik moment. The conflict thus seems to be becoming more and more serious and to increasingly resemble an economic cold war.

The road ahead …

As so often before, May was a month of unrest in the markets. For long-term investors, fluctuations are part of the "game" and in reality the reason that they can expect a higher return over time than if they have their money in the bank.

"American greatness was elevated significantly after Sputnik"
Buzz Aldrin