21 May - update from our investment partner

  • 21st May 2020

What has happened

Markets continued their path higher yesterday despite a near term escalation in US/China rhetoric. The rally was broad with almost all sectors being buoyed by the more positive sentiment, additionally the US is now at its highest level since the depths of the coronavirus crisis sell-off.

US/China tensions rise again

Secretary of State Pompeo said that China was ruled by a brutal, authoritarian regime and that Beijing was hostile to free nations. The ‘free nations’ comment came after Pompeo had been previously criticised by China for congratulating the Taiwanese President on her inauguration when China claims Taiwan under its ‘one China’ principle. Adding to the US/China theme yesterday, the US Senate passed legislation forcing companies to certify that they are not under the control of a foreign government in order to be listed on a US exchange, again this is clearly aimed at China. The fact that the Senate bill passed unanimously is a sign of the bipartisan support for a tough stance on China.

Negative rates in the toolkit for the Bank of England

Closer to home Bank of England Governor Bailey said that the BoE’s toolkit remains under active review which includes the possibility of negative interest rates. This is quite a large U-turn from the position a week ago where the BoE’s position was that the undesirable impacts of negative rates on the banking sector outweighed the positives. The European banking sector has been under stress due to peripheral debt issues but the situation has not been helped by negative interest rates. Banks traditionally make a margin between borrowing short (deposits) and lending long (mortgages), this margin is compressed in a negative interest rate world and means it is far more difficult to generate returns for equity holders. The European banking sector is a warning to the Bank of England that moving into negative rates is not without its costs.

What does Brooks Macdonald think

Markets managed to rise yesterday despite the more hawkish comments by the US in relation to China. This is clearly a risk that will bubble away and the unanimous passing of the Senate bill is a reminder to markets that this is not just a populist act by Donald Trump but rather a policy which holds widespread support in Washington.

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