Pricing uncertainty

Posted by: Paul Donovan

04 Jun 2019
  • Equity markets really dislike paying trade taxes (which target equities). However, bond markets reacted more strongly to the latest US tax hikes. US Federal Reserve President Bullard (a central banker who can rarely see a rate without wanting to cut it) hinted that trade tax hikes could cause US rate cuts.
  • The damage from trade taxes via uncertainty is longer term. The interminably tedious EU-UK divorce process added uncertainty to the UK; 2018 foreign direct investment into the UK fell 13%. As US trade taxes are a policy objective in their own right, not just a (bad) tool to regulate trade, a risk premium to investing in the US may be added. This hurts longer-term growth.
  • Italy's political scene echoed to the sound of two heads being banged together yesterday. Prime Minister Conte said EU budget rules would be respected and told the two coalition partners to agree or have a general election. Both parties issued conciliatory statements. The leaders meet with Conte today. The government may possibly survive the summer.
  • US durable and capital goods orders are due. Capital spending is affected by uncertainty, so these are relevant numbers. Fed President Williams and Fed Chair Powell are due to speak.

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