13 May - update from our investment partners

  • 13th May 2020

What has happened

European markets were mostly calm yesterday, but this sense of serenity was shattered in the last hour of US trading where sentiment soured leading the US equities to close down 2%. Two factors conspired to cause this: a warning from a senior US health official over the risks of easing lockdown and a Republican Senate bill designed to allow Donald Trump to issue sanctions on China if it’s report on the causes of COVID-19 is deemed unsatisfactory.

Dr Fauci’s testimony

The Director of the National Institute of Allergies and Infectious Diseases, Dr Fauci, gave a testimony to the US Senate health committee. In this he warned that reopening the US economy ran the risk of greater damage down the road if it was proven premature and led to a surge in new case growth driving a subsequent second lockdown. Other top health officials warned of the timeline to find a vaccine for coronavirus as well as caution that the current official death toll could be understating the total fatalities, a similar assessment in the UK was reported yesterday.

Republican Senators rachet up China hawkishness

Senator Lindsay Graham led the introduction of a Republican bill to the US Senate designed to put political pressure on China whilst reiterating the party’s policy of being tough on the superpower. The specific wording would give the power to the President to “impose sanctions on the People’s Republic of China if China fails to cooperate and provide a full accounting of the events leading up to the outbreak of COVID19.” Given how nervous markets are about the risk of US/China tensions being layered on top of the coronavirus woes, it is little surprise that this damaged sentiment.

What does Brooks Macdonald think

Neither Dr Fauci’s testimony nor the Republican bill are particularly material but they simply served as poignant reminders of the two big risks out there at the moment. Markets are largely ignoring the dire economic data as they look through the recession to the recovery but they are only able to do this if the lockdown is seen as temporary. The warning of a second wave in the US at the same time as we are possibly seeing one in South Korea struck a chord. Equally the US bill might not pass but it is a warning shot from China hawks that still form a large bloc within the Republican party. We believe the strategic case for equities over bonds is still intact however near term volatility from concerns over a reversion to US/China tensions or a second spike in cases is a real risk.

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