International Communique No.245 – US AND CHINA RESUME THEIR TUG OF WAR

//International Communique No.245 – US AND CHINA RESUME THEIR TUG OF WAR

International Communique No.245 – US AND CHINA RESUME THEIR TUG OF WAR

2020-05-19T11:47:47+10:00May 19th, 2020|

US AND CHINA RESUME THEIR TUG OF WAR

Equities headed lower last week, especially in Europe, where the EuroStoxx 50 shed more than 4% of its value on the back of distressing economic statistics and renewed wrangling between the US and China. Automotive and banking stocks especially took a drubbing. In investors’ minds, the prospects of eased business restrictions were outweighed by the lingering effects of Covid-19 on consumer behaviour.

The outlook is hazy as Washington and Beijing reignite their war of words, jeopardising by the same token their interim trade agreement. The White House is banning deliveries of components to Huawei from September. The Chinese could retaliate by restricting business flows for Qualcomm, Cisco or Apple. All this has been weighing on the technology sector. The US administration has also reportedly taken steps to force the federal pension fund to freeze its allocation to Chinese stocks. With the presidential election less than 6 months away, tensions between the two superpowers will remain a potential source of volatility.

In the US, retail sales have fallen by 16% since March. The consumer price index (excluding food and energy) fell 0.4% in April – an unexpected drop. The spectre of deflation precipitated talk in the market of negative US rates. But Fed chair Jerome Powell poured cold water on this idea, stating that none of the FOMC members considered it a valid monetary-policy option. In any case, there is no real evidence that negative rates have any significant impact on economies, while year-on-year inflation is still ticking along at 1.4%. Powell believes that it will take a vaccine to restore consumer confidence to what it was. Even so, in the absence of a second wave, he sees the economy recovering steadily in the second half of the year.

Concerning stimulus measures, Germany is planning a supplementary outlay of around EUR 100 billion, while the US House of Representatives has passed a USD 30,000 billion package (although the Republicans in the Senate are standing in its way).

Stocks made a firm start to the week as many countries continue to unshackle their economies after the outbreak. By contrast, investors are taking a cautious stance pending the next batch of macroeconomic figures (European and US PMIs, in particular). Their mood is reflected in the rising price of gold – a safe haven – to its highest level since 2012. No doubt about it: the breathtaking recovery in equity indices from their March lows is running well ahead of the economic reality.
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