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Concerns over Brexit and trade wars resurface as virus threat recedes
Thursday 28 May 2020 Author: Ian Conway

For all the talk of stock markets bouncing back from March lows, UK shares have only delivered marginal gains in the past six weeks. At 6,088 on 26 May, the FTSE 100 index was up just 5.1% since 14 April, despite some wild one-day moves. US stocks have performed in a similar fashion.

While coronavirus and its impact on the economy and company earnings are still the main drivers, older concerns like a ‘no-deal Brexit’ and the US/China trade war have begun to resurface.

Negotiators on both sides admit that limited progress has been made on key issues regarding Britain’s exit from the European Union (EU), and time is fast running out for a settlement. The transition period ends on 31 December and the UK has ‘no intention’ of changing this date.

The UK’s chief Brexit negotiator David Frost has said the prospect of ‘no deal’ to avoid the UK being subject to EU supervision is ‘not a simple negotiating position which might move under pressure – it is the point of the whole project’.

If a deal isn’t agreed with the EU, the UK will default to World Trade Organisation (WTO) quota and tariff rules from 1 January 2021. Car makers will be subject to 10% tariffs on exports to Europe, while tariffs on agricultural products are as high as 35%.

Meanwhile the US has ramped up its rhetoric against China, publishing a 16-page White House manifesto outlining an aggressive stance towards international trade, and blacklisting 33 Chinese firms and institutions from access to US technology on national security and human rights concerns.

The Trump administration also passed a bill that could block Chinese companies from listing their shares in the US. The increased tension has led Chinese search engine giant Baidu to consider delisting from the US Nasdaq market. Baidu’s US shares are among the top holdings of investors like Scottish Mortgage Investment Trust (SMT) and many global technology funds.

China has responded by introducing a new security act in Hong Kong, removing more of the island’s autonomy, and flexing its military muscle across the region.

This sent UK stocks with a large Hong Kong presence, such as FTSE heavyweights HSBC (HSBA) and Prudential (PRU), sharply lower in panicked trading last week.

While the impact of the pandemic seems to be priced into stocks, the prospect of the UK leaving the EU with no trade deal and renewed tension between the world’s two biggest superpowers is rightly making investors nervous.

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