27 May - update from our investment partner

  • 27th May 2020

What has happened

Global equities rallied yesterday as UK and US assets caught up with the gains they missed on Monday due to the Bank Holiday.

US/China sours the mood

The small fly in the ointment was from US/China tensions which soured the mood in the last hour of US trading. The main source of this were reports that the Treasury Department could impose sanctions in relation to Chinese actions over Hong Kong. This comes as the Hong Kong protests have restarted in earnest and external political pressure mounts to preserve the division between Hong Kong and mainland China. The markets are still trying to weigh up the likely outcome of the US/China escalation. On the face of it both sides have an interest in curtailing further economic damage given coronavirus has left a heavy dent in global economic activity. The Phase One trade deal contains a helpful reduction in tariffs for China and also contains promises to buy US agricultural goods which will be useful political capital for Donald Trump in the Presidential elections. Given the bipartisan support for a ‘tough on China’ stance it is unlikely that this risk is going away any time soon though the degree that the White House wants to escalate tensions may be restrained by the economic realities of the current crisis.

European recovery fund proposal to be unveiled

The focus of today will be the European recovery fund and specifically whether the European Commission is able to draw up a proposal that satisfies the Merkel/Macron plan and that of the Frugal Four. Given the starting points are so far apart we remain quite sceptical of a break through today. The best outcome one can realistically expect is that clear negotiation points are agreed. Without the philosophical deadlock being broken between an entirely grant based programme and an entirely loan based programme, no real progress can be made. If today’s proposals end with the two blocs debating the relative mix of loans and grants this would be a meaningful step.

What does Brooks Macdonald think

Markets are content at the moment to conclude that US/China tensions will need to be kept in check by both sides in order to prevent economic damage during the tentative recovery. This remains our base case as well but we do see downside risk here, particularly given the bipartisan support in the US legislature for a more hawkish China policy. This raises the risk that both Democrats and Republicans try to ‘out-hawk’ each other in the run up to November’s vote and this is unlikely to be great news for risk appetite.

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