24 July - update from our investment partner

  • 24th July 2020

US/China relations continue to be closely monitored by markets.

What has happened

After the European session closed, the US index faltered, driven by concerns over the US/China trade war, unemployment data and possible delays to the US fiscal stimulus. The US technology sector was a key casualty closing down over 2%, as it is viewed as particularly sensitive to deteriorating US/China relations. Whilst European indices missed the weakness yesterday, they are playing catch up today, opening lower.

China hawkishness

Secretary of State Pompeo’s speech was quite hawkish and came hours after China ordered the closing of the Chengdu US consulate. The Chengdu consulate is seen as strategically important to the US given its proximity to Tibet and follows the closure of the Chinese consulate in Houston. Risk appetite has been reacting not only to the negative news flow but also the broadening of anti-China rhetoric which now includes many major Western US allies. It looks increasingly likely that there will be a more strategic position taken to control the expansion of Chinese influence going forward. This will not have just a political impact but also potentially reverse some of the globalisation trends which were already under threat by the pickup in political pressure to onshore manufacturing back to the US.

Employment statistics waver

The US weekly jobless claims saw an increase in claims for the first time since the end of March. The claims increased to 1.416m versus a market expectation of 1.3m. Some economic impact of the reversal of US lockdown easing was inevitable at some point. The market however expected the economic impact to be slower given many of the measures have targeted a small number of high-risk businesses and have focused on measures such as mandatory face coverings.

What does Brooks Macdonald think

The step up in US/China rhetoric was inevitable as the US Presidential elections approach however the Hong Kong security law has acted as a catalyst for other Western democracies to begin to choose sides. The risks of a cold war between a US-led bloc and the Chinese sphere of influence is unlikely to lead to economic positives for either side but markets will be watching the political momentum closely to gauge the path of travel.

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