U.S. – China: Tariff Tumult

U.S. – China: Tariff Tumult

Negotiations on a U.S. - China trade agreement hit a snag; U.S. inflation continued its sluggish pace in April; South Africa's election was a qualified victory for the ruling ANC.

“It is hoped that the U.S. and Chinese sides will meet each other halfway and work together”
China's Ministry of Commerce

U.S. – China: Tariff Tumult  

The U.S. raised its tariffs on $200 billion worth of goods it imports from China from 10% to 25% just as China’s top-level trade negotiation team arrived in Washington for meetings that some U.S. observers had speculated  might feature a signing ceremony on a wide-ranging, historic trade agreement.

There will, however, be a delay in the full impact; the White House has effectively delayed the increase by saying it only applies to goods that leave China on Friday, May 10 or afterward. Oceangoing goods already on their way to US ports would be subject to the 10% tariff policy.

Financial markets reacted mostly negatively during the week, with the S&P 500 down as much as 3.8% off its highs the previous Friday, May 3. But reaction was muted in the immediate aftermath of President Donald Trump’s announcements of a breakdown in talks late Wednesday and Thursday, May 8-9, blaming China for the impasse. Wednesday saw the S&P 500 rise just under 0.2% from Tuesday’s close, and Thursday saw it rise 0.4% from its opening price – though the index ended the day down some ‑0.3% from Wednesday’s close.

China’s official reaction to Thursday’s announcements and speeches was represented by an article in several outlets, including the Xinhua press agency, with the headline “If You Want to Talk, We Can Talk. If You Want to Fight, We’ll Fight”.

U.S. slow-flation: “Transitory”?

April’s core consumer prices (core CPI) rose 0.1% since March, vs. expectations of 0.2%. Including food and energy, the rise was 0.3%, also falling short of expectations. Year-on-year, core CPI rose 2.1%, in line with forecasts.

The slight shortfall challenged Fed Chair Powell’s assessment during the FOMC’s May 1 press conference that sluggish inflation was due to “transitory” factors.  Financial markets appeared to agree, if briefly; the yield on the 10-year Treasury fell to as low as 2.4334 at 8:30 AM, the time of the announcement, and the market for Fed Funds futures saw a slight increase in the odds of a Fed rate cut by the end of 2019.

Emerging Markets: South Africa election

Investors in emerging markets received some welcome positive political news; the early results of South Africa’s hotly-contested national election showed the ruling African National Congress (ANC) receiving a majority of about 57% of the vote, with 90% of ballots counted.  The results were seen by many as a generally favorable verdict on the sitting government’s ongoing efforts to end what is widely regarded within South Africa as rampant corruption and economic stagnation.

But the results fell short of complete vindication. Voter turnout may end up being the lowest since the end of Apartheid in 1994, and the opposition Economic Freedom Fighters (EFF) received about 10% of the vote, doubling the number of its seats in the National Assembly, and making gains in all nine provinces.  The EFF platform includes controversial land reform measures. The moderate Democratic Alliance, conditionally supportive of the ANC, lost some ground.

Financial markets treated the news as broadly positive.  The South African rand rose as high as 14.18 per U.S. dollar; the 10-year sovereign bond yield fell to as low as 9.05% and South African credit default swaps improved, tightening 9.35 basis points to 184.9.


All dcata Source: Bloomberg, May 10 2019, 9:00 AM ET, unless otherwise indicated.


The Consumer Price Index (CPI) measures the average change in U.S. consumer prices over time in a fixed market basket of goods and services determined by the U.S. Bureau of Labor Statistics.

The Core Consumer Price Index (Core CPI) excludes the prices of food and energy, which are volatile on a monthly basis, from the basket of goods used to determine the CPI.

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (Fed) responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The Federal Funds rate (fed funds rate, fed funds target rate or intended federal funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.

credit default swap (CDS) is designed to transfer the credit exposure of fixed income products between parties.

One basis point is one one-hudredth of a percentage point.


Important Information


All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is approved for distribution in those countries and to those recipients listed below. Note: this material may not be available in all regions listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Qualified Investors in Switzerland:
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.  Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All investors in the UK:
In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People’s Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia and New Zealand:

This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827).  The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.

Yields and dividends represent past performance and there is no guarantee they will continue to be paid.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

Derivatives, such as options and futures, can be illiquid, may disproportionately increase losses and have a potentially large impact on Fund performance.