Tariff threat trips the circuit breaker, setting the scene for a 50 basis points (bps) Fed rate cut in September

7 August, 2019

Frances Donold, Chief Economist, Head of Macroeconomic Strategy

On 1 August, the Trump administration announced a new set of tariffs on the remaining US$300 billion of Chinese goods to be imposed on 1 September¹ . The US-China trade war further escalated on Monday with the US Treasury Department designating China as a currency manipulator and the US dollar/Chinese renminbi (USD/CNY) rose above the 7.00 level² . Equity markets plunged around the world. Frances Donald, Chief Economist and Head of Macroeconomic Strategy, explains why this phase of the trade war is different.

We view this next round of tariffs as a gamechanger that alters our prior views regarding US acceleration and a stabilising China. The new tariffs have tripped the circuit breaker and in our view are likely to single-handedly reverse the course of both the US and the global economy in the third quarter. This development is particularly disappointing, given that most of our research had found green shoots of stabilisation and potential recovery in US business investment, global trade, and the global manufacturing recession. Unfortunately, heightened trade tensions nip those positive developments squarely in the bud and necessitate two key changes of view from the macro strategy team.

We’ve changed our view from expecting a 25 basis points (bps) rate cut from the US Federal Reserve (Fed) in September, followed by an extended pause, to a 50bps cut with the potential for more. We also believe an intra-meeting cut is possible, although that isn’t our base case. To be clear, we don’t believe that 50bps of cuts from the Fed will single-handedly salvage business or consumer confidence, but it could buffer some of the decline in market sentiment, arrest this new round of yield curve flattening, and soften the upside pressure on the US dollar. The Fed would welcome all of those.
We believe a neutral risk exposure in the short-term makes sense, heading into what we expect to be a difficult, volatile, and particularly uncertain August and September. However, this doesn’t change our moderately constructive 12-month view, as we believe risk assets (credit and equity) are still in an overall uptrend and will be supported by a low rate environment and extended—albeit weak— business cycle. Indeed, our internal conversations in the past two market days (as of 5 August) have questioned when the appropriate time will be to buy this dip—it’s almost entirely dependent on the progression of trade tensions and, secondarily, concerns about emerging-market currencies. In the meantime, US Treasuries and global debt can rally further, and there is some mild-tomoderate room left for equities to decline from here.

Why the change of view?

While markets are now accustomed to trade tensions, this newly proposed set of tariffs comes with three characteristics that are causing us much more concern than all past iterations.

This set of tariffs affects the US consumer in a more substantial manner who, until now, has offset weakness in business investment. In particular, new tariffs are tipped to hit electronics, apparel, and toys and are therefore likely to hamper consumer confidence, spending, and prices. This effect is unique to this new bucket of goods.
While we feel the USD/CNY crossing 7.00 is more of a psychological level than an economically important development, the move cements two risk-off narratives: a low but rising possibility of a capital outflow crisis from China, and retaliatory measures from China that may further dampen US and global growth activity.
Aggressive global yield curve flattening reignites recession probability indexes and increases the chance of a curve-driven recession in 2020. We aren’t currently expecting a technical recession in 2020, but the depth of the confidence shock resulting from higher tariffs could bring US growth to 1% in 2020 or slightly below, depending on the magnitude.

Where do we go from here?

Upside scenarios are more limited now than they were six months ago. They are generally more associated with the potential for additional easing than the market currently expects from global central banks (already a tall order) and/or possible large-scale stimulus from China. Clearly, a reversal of the tariff threat would also present an important catalyst. While the above is all possible, we suggest stepping to the sidelines until we have more visibility on growth.

Asset allocation views on SpaceX IPO, Reopening of Strait of Hormuz, and the BOJ rate hike

The Multi Asset Solutions Team (MAST) provides asset allocation views on three recent developments that could influence markets in different ways: the SpaceX Initial Public Offerings (IPO), the reopening of the Strait of Hormuz, and the Bank of Japan’s (BOJ) rate hike. In our view, these events create mixed signals across growth, inflation and liquidity. Overall, the backdrop still appears uneven, and this may support a measured and selective approach to asset allocation rather than a broad increase in risk.

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China Fixed Income: From deflation to reflation: what comes next?

After a prolonged period of deflation, China’s economy is turning the corner towards inflation. In this investment note, the China Fixed Income team analyses why this reflationary transition is important for China bonds and offers implications for investors in government policy, rates, and the renminbi.

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Not another bubble: How semiconductors are powering a real future

Semiconductors sit behind almost every modern experience – from smartphones and cars to cloud computing and today’s AI tools – yet they remain largely invisible to most people. They are more than chips only, and the demand is being supported by several long-term forces. We believe that today’s semiconductor excitement is not a repeat of the dot-com bubble, as investment is tied to real infrastructure and revenue-generating services. And the opportunity is broader than a handful of headline AI names.

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¹ US Department of the Treasury, 5 August 2019.

² Bloomberg, as of 5 August 2019.

Asset allocation views on SpaceX IPO, Reopening of Strait of Hormuz, and the BOJ rate hike

The Multi Asset Solutions Team (MAST) provides asset allocation views on three recent developments that could influence markets in different ways: the SpaceX Initial Public Offerings (IPO), the reopening of the Strait of Hormuz, and the Bank of Japan’s (BOJ) rate hike. In our view, these events create mixed signals across growth, inflation and liquidity. Overall, the backdrop still appears uneven, and this may support a measured and selective approach to asset allocation rather than a broad increase in risk.

Read more
China Fixed Income: From deflation to reflation: what comes next?

After a prolonged period of deflation, China’s economy is turning the corner towards inflation. In this investment note, the China Fixed Income team analyses why this reflationary transition is important for China bonds and offers implications for investors in government policy, rates, and the renminbi.

Read more
Not another bubble: How semiconductors are powering a real future

Semiconductors sit behind almost every modern experience – from smartphones and cars to cloud computing and today’s AI tools – yet they remain largely invisible to most people. They are more than chips only, and the demand is being supported by several long-term forces. We believe that today’s semiconductor excitement is not a repeat of the dot-com bubble, as investment is tied to real infrastructure and revenue-generating services. And the opportunity is broader than a handful of headline AI names.

Read more

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Certain sub-funds with significant exposure to Renminbi (“RMB”) bonds/equity/assets or emerging markets, may involve debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with the world's more established markets.
A bond sub-fund may hold a significant portion of assets in deposits if there are not sufficient RMB instruments for it to invest in. This may adversely affect its return and performance.
Certain sub-funds using invest directly in debt instruments/shares via QFII regime, the Bond Connect and/or the Foreign Access Regime are subject to various requirements and restrictions under the laws of Mainland China related to investment in QFII and/or China Interbank Bond Market and custodial risks.
RMB is not freely convertible and is subject to exchange controls and restrictions.
Certain sub-funds may have significant concentrated exposures to particular industry sectors and geography's, which subjects investors to concentration and equity market risk.
Certain sub-funds may invest in equities of small- and mid-capitalization companies, which can expose investors to liquidity and volatility risks, and is subject to greater risk than is customarily associated with investments in larger capitalization companies.
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The funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. Dividends may be paid out of capital and/or out of gross income of certain funds in respect of Inc classes, while charging/paying all or part of certain funds’ fees and expenses to/out of capital of certain funds. This represents a return or a withdrawal of part of an investor's original investment amount or capital gain attributable to that amount. Distributions will result in an immediate decrease in the net asset value of the relevant units. Class AA (RMB) Inc Hedged Unit of certain funds is subject to higher distribution risks than other non-hedged unit classes.
Certain funds may involve equity market, emerging markets, Dim Sum bond market, concentration, volatility, liquidity, credit, credit ratings, below investment grade and unrated securities, credit rating downgrading, interest rates, valuation, sovereign debt, unlisted debt securities, political and regulatory, currency, foreign exchange, derivative and structured product, hedging, and distribution risks. Certain investors may also be subject to the risk relating to RMB hedged share class..
Certain funds are subject to the risks of investing in other funds and the risks relating to asset allocation strategy and/or downside risk management process.
Certain fund is subject to the risks relating to investment in exchange traded funds, Strategic and Tactical Asset Rebalancing Strategy (“STARS”), small- and mid-capped companies, convertible bonds and the risks associated with securitised debt instruments and investments in loss-absorption features. Certain fund is a feeder fund that invests all or substantially all of its assets in another collective investment scheme (the “master fund”) and is therefore subject to the risks of investing in the master fund.
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This website is not intended for use by any individual in any jurisdiction where, due to their nationality, residence, foreign exchange control or other circumstances, the publication or access to this website is restricted or prohibited. It shall be the sole responsibility of the investor to acquaint themselves with, and to comply with, all applicable laws and regulations of any relevant jurisdiction.
Funds offered on this platform may invest in equity, fixed income securities, exchange-traded funds, collective investment schemes and/or other instruments, including derivatives, and each of which has its specific investment objective/ policy with its specific features and different risk profile.
Distribution of dividends, the frequency of distribution and the amount/rate of dividends are not guaranteed. Dividend of certain share/unit classes, at the fund or the investment manager’s discretion, may be paid out of capital or gross income while charging / paying all or part of its fees and expenses out of its capital. This amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the net asset value per share/unit of the respective share/unit classes after the distribution date.
Some funds may invest in bonds or debt securities which may be subject to credit, liquidity, counterparty and market risks.
Some funds may invest in non-investment grade bonds and unrated securities which may be subject to greater credit and liquidity risks, and may be more volatile than higher rated securities. Some funds may invest in investment grade debt securities, which may be subject to ratings downgrades by the rating agencies that may affect the net asset value of the fund.
Some funds may invest in derivative instruments which may involve additional risks. (For example, leverage may cause greater volatility.)
Some funds may make extensive use of derivatives including more complex derivative instruments or strategies to achieve the investment objective, this may give rise to additional exposure in that performance may rise or fall more than it would have done otherwise. In adverse situations, the fund’s use of derivative instruments may become ineffective and the fund may suffer significant losses. The use of derivatives may give rise to leverage, liquidity, counterparty and valuation risks.
Some funds may invest in emerging economies or markets, where special risks, including liquidity, volatility, government policies, taxation, currency, currency repatriation, political and regulatory risks, may be substantially higher than the risks normally associated with more developed economies or markets.
Some funds may invest in securities of small and/or medium sized companies in the relevant markets. This can involve greater risk than is customarily associated with investments in larger and more established companies.
Some funds may invest in a single country/region and/or a particular industry sector which may be concentrated and subject to greater risks than diversified investments in several countries and/or regions and across sectors.
Some funds may invest directly in certain China A shares via the Stock Connect, which may involve risks related to investments via the Stock Connect and Mainland China investment.
Some funds may have significant exposure to Renminbi ("RMB") bonds/equity/assets or emerging markets, which will be subject to debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with more established markets.
Some funds with significant exposure to RMB bonds/equity/assets may hold a significant portion of assets in deposits if there are not sufficient RMB instruments to invest in. This may adversely affect the funds’ return and performance.
Some funds using Qualified Foreign Institutional Investor (“QFII”) quota to invest directly in debt instruments/shares in Mainland China may be subject to various requirements and restrictions under the laws of Mainland China related to QFII investment and custodial risks.
Some funds are subject to the risks of investing in other funds and the risks relating to asset allocation strategy and/or downside risk management process.
As RMB is not freely convertible, currency conversion is subject to exchange controls and restrictions. There can be no assurance that RMB will not be subject to devaluation. Insufficient amount of RMB for currency conversion or devaluation of RMB could adversely affect the value of investors’ investments in the RMB denominated class(es) of certain funds. The “Dim Sum” bond market is still a relatively small market which is more susceptible to volatility and illiquidity. Due to RMB concentration risk, the value of the funds with substantial RMB exposure may be more volatile than that of a fund having a more diverse portfolio of investments.
Some funds’ performance will be closely tied to the economic, political, regulatory, geopolitical, market, currency or other conditions in the European Economic Area and may be subject to increased liquidity, price, and foreign exchange risk.
Some funds may invest in Russia and some investments in Russian securities may be unlisted securities not dealt on a regulated market. The Russian market presents specific risks in relation to the settlement and safekeeping of securities.
Investment involves risk. Investors may expose to capital loss and should not invest solely based on the information on this website alone and should read the offering documents for details including the associated risk factors, charges and features of the funds and their share/unit classes. Past performance information is not indicative of future performance.

Manulife Global Fund

Manulife Global Fund is an umbrella fund comprising a number of sub-funds investing in equity and/or fixed income securities, each of which has a different investment objective and risk profile and may involve equity market, geographical concentration, sovereign debt, liquidity, volatility, credit downgrade, interest rate, counterparty risks. Certain investors may also be subject to the risk relating to RMB hedged share class.
The relevant distributing class of the sub-funds does not guarantee distribution of dividends, the frequency of distribution and the amount/rate of dividends. Dividends may be paid out of income, realized capital gains and/or out of capital of certain sub-funds in respect of Inc share class(es). Dividends may be paid out of realized capital gains, capital and/or gross income while charging all or part of their fees and expenses to capital (i.e. payment of fees and expenses out of capital) in respect of MDIST (G), R MDIST (G) and F MDIST (G) share class(es). Dividends paid out of capital of these sub-funds amounts to a return or withdrawal of part of the amount of an investor’s original investment or from any capital gains attributable to that original investment and may result in an immediate decrease in the net asset value per share in respect of such class(es) of the sub-funds. Fixed yield share classes pay out a pre-determined annualized fixed percentage of their NAV, which can be adjusted by the Directors with at least one month’s prior notice, do not entirely reflect the actual or expected income or performance of the Fund. These distributions may exceed the actual income, leading to capital erosion, especially during negative returns or losses, and may reduce future capital growth. A positive distribution yield does not guarantee a positive return, and the absolute distributions vary with the NAV, resulting in fluctuating monthly payouts for investors.
Certain sub-funds invest in emerging economies or markets, where special risks, including liquidity, volatility, government policies, taxation, currency, currency repatriation, political and regulatory risks, may be substantially higher than the risks normally associated with more developed economies or markets.
Certain sub-funds invest in securities of small and medium sized companies in the relevant markets. This can involve greater risk than is customarily associated with investments in larger and more established companies.
Certain sub-funds concentrate their investments in a single country and/or a particular industry sector are subject to greater risks than diversified investments in several countries and/or regions and across sectors.
Certain sub-funds may invest directly in certain China A shares via Stock Connect, which may involve in risk related to Investments via Stock Connect and Mainland China investment.
Investment involves risk. The sub-funds may expose their investors to capital loss. Investors should not invest solely based on this material and should read the offering document for details including the risk factors, charges and features of the sub-funds and their share classes.
Each sub-fund intends to use financial derivative instruments (“FDIs”) for investment, efficient portfolio management and/or hedging purposes. The use of FDIs exposes the Fund to additional risks, including counterparty/credit risk, liquidity risk, valuation risk, volatility risk and over-the-counter transaction risk.
Given RMB is currently not a freely convertible currency, payment of redemptions and/or dividend payment in RMB may be delayed due to the exchange controls and restrictions applicable to RMB. As offshore RMB (CNH) will be used for the valuation of RMB denominated Class(es), CNH rate may be at a premium or discount to the exchange rate for onshore RMB (CNY) and there may be significant bid and offer spreads and thus the value of the RMB denominated Class(es) will be subject to fluctuation. Any devaluation of RMB could adversely affect the value of investors’ investments in the RMB denominated Class(es) of certain sub-funds.

Manulife Advanced Fund SPC

Manulife Advanced Fund SPC is an umbrella fund comprising a number of sub-funds investing primarily in equity and bond securities, each of which has a different investment objective and risk level.
The sub-funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. A sub-fund may at its discretion pay dividend out of capital or gross income while charging / paying all or part of its fees and expenses out of its capital. This amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the net asset value per share of the respective share classes after the distribution date.
Certain sub-funds with significant exposure to Renminbi (“RMB”) bonds/equity/assets or emerging markets, may involve debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with the world's more established markets.
A bond sub-fund may hold a significant portion of assets in deposits if there are not sufficient RMB instruments for it to invest in. This may adversely affect its return and performance.
Certain sub-funds using invest directly in debt instruments/shares via QFII regime, the Bond Connect and/or the Foreign Access Regime are subject to various requirements and restrictions under the laws of Mainland China related to investment in QFII and/or China Interbank Bond Market and custodial risks.
RMB is not freely convertible and is subject to exchange controls and restrictions.
Certain sub-funds may have significant concentrated exposures to particular industry sectors and geography's, which subjects investors to concentration and equity market risk.
Certain sub-funds may invest in equities of small- and mid-capitalization companies, which can expose investors to liquidity and volatility risks, and is subject to greater risk than is customarily associated with investments in larger capitalization companies.
Investment involves risk. The sub-funds may expose to a high risk of capital loss. Investors should not invest solely based on this material and should read the offering document for details including the risk factors, charges and features of the sub-funds.

Manulife Hong Kong Series

Manulife Hong Kong Series (“the Series”) is an open-ended unit trust comprising a number of funds primarily investing in equities, debt securities, exchange-traded funds and/or collective investment schemes, each of which has a different investment objective and risk level.
The funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. Dividends may be paid out of capital and/or out of gross income of certain funds in respect of Inc classes, while charging/paying all or part of certain funds’ fees and expenses to/out of capital of certain funds. This represents a return or a withdrawal of part of an investor's original investment amount or capital gain attributable to that amount. Distributions will result in an immediate decrease in the net asset value of the relevant units. Class AA (RMB) Inc Hedged Unit of certain funds is subject to higher distribution risks than other non-hedged unit classes.
Certain funds may involve equity market, emerging markets, Dim Sum bond market, concentration, volatility, liquidity, credit, credit ratings, below investment grade and unrated securities, credit rating downgrading, interest rates, valuation, sovereign debt, unlisted debt securities, political and regulatory, currency, foreign exchange, derivative and structured product, hedging, and distribution risks. Certain investors may also be subject to the risk relating to RMB hedged share class..
Certain funds are subject to the risks of investing in other funds and the risks relating to asset allocation strategy and/or downside risk management process.
Certain fund is subject to the risks relating to investment in exchange traded funds, Strategic and Tactical Asset Rebalancing Strategy (“STARS”), small- and mid-capped companies, convertible bonds and the risks associated with securitised debt instruments and investments in loss-absorption features. Certain fund is a feeder fund that invests all or substantially all of its assets in another collective investment scheme (the “master fund”) and is therefore subject to the risks of investing in the master fund.
Certain fund will not have direct investments other than cash, cash equivalents and financial derivative instruments (such as futures, options and forwards).
Investment involves risk. The funds may expose its investors to capital loss. Investors should not make investment decisions based on this material alone but should read the offering document for details, including the risk factors, charges and features of the Fund and its unit classes.

Important notice