Renewed trade tensions and the actions of central banks could become a new source of market volatility as we head into the second half of 2019. Whilst a resynchronised global slowdown and low inflation have resulted in a reversal of the Federal Reserve’s and other central banks’ interest rate stance, a positive sign, questions around what investors should look out for in the coming months remain. 
A replay of the ‘Clash of the Titans’?
The ongoing clash between the US and China is representative of today’s multi-polar world, and markets need to adjust to the reality of the longer-term nature of the dispute.
Both president Donald Trump and president Xi Jinping will likely want to agree to a resolution, but without being seen to have made too many concessions.
As 2019 marks the 70th anniversary of the People’s Republic of China – an extremely important year for the country – the Beijing government is unlikely to budge an inch. However, China needs a trade deal to help maintain economic growth above 6% next year and to deliver its 10-year goal of doubling the per-capita income in both rural and urban populations by 2020.
China’s retaliatory move to raise tariffs will likely hurt the US economy through higher prices. That said, we do not believe it would hamper the Fed’s ability to cut interest rates, especially if the US needs this at a later stage.
Similarly, heading into the 2020 Presidential election, Trump will need a strong economy to quell Republican backlash in agricultural districts, thus leading to his “Dance of Trade” against China.
With global growth at stake, it is hoped that president Trump and president Xi would come to an eventual resolution, although the June deadline appears ambitious.
US-China trade scenarios for the second half of 2019 and the resulting impacts on global equities
‘Peripheral’ topics such as Iran or North Korea are also potentially at play, meaning it is more likely that the current imposed tariffs will remain. That said, the additional tariffs on the rest of China’s exports to the US (around $300bn) tend to stay untouched.
With markets disliking uncertainty, risk assets are likely to remain under pressure until we achieve greater clarity.
A more accommodative backdrop
Turning attention to the role of central banks, there is a significant difference between the current backdrop and 2018.
Global central banks have all shifted to a more dovish stance. The Bank of Japan, Bank of Canada and the European Central Bank, for example, have kept interest rates unchanged at their last meetings. Taking their cue from these major central banks, emerging-market central banks have made 12 net interest rate cuts between February and April this year.
Despite persistently low inflation, the central banks’ “tool box” in Europe and Japan is smaller than it was in 2008, now having less room to manoeuvre with rate cuts to stimulate growth and inflation. Given these challenges, governments may place greater focus on fiscal and banking reforms instead.
The accommodative stance by developed and emerging-market central banks will lend some support to the global economy and global bond markets.
Dovish shifts of major developed-market central banks
New chiefs, new volatility? New tool box
The important role played by central banks also implies that the upcoming changes at the helm in selected central banks may be a new source of volatility for the markets.
In October, Mario Draghi will step down as European Central Bank president. Under his tenure, the ECB embarked on a quantitative easing bond-buying programme, as well as targeted longer-term refinancing operations. Such accommodative measures have provided ample liquidity support for troubled banks, especially those in debtor countries.
Draghi’s successor will surely inherit a plan to gradually unwind these measures. While many are trying to anticipate when the ECB will start raising rates, it is important to realise that in a slower global growth environment, the ECB may find it difficult to implement.
Similarly, the search for the next governor of the Bank of England is underway. The incumbent Mark Carney will leave office in January 2020. The new governor must be able to maintain global confidence in UK financial markets, not to mention finding the firepower to handle any financial shocks that may stem from a “no deal” Brexit.
Besides the rise of economic nationalism and populism in their countries, the new chiefs will face a similar dilemma on the monetary front.
As we progress through 2019, both political and economic pressures suggest that central bank independence globally is coming under greater scrutiny. Ultimately, financial markets will be unnerved if policymakers are seen to succumb to political pressures and volatility continues.
Virginie Maisonneuve is chief investment officer of Eastspring Investments. The views expressed above are her own and should not be taken as investment advice.