4 May - update from our investment partners

  • 4th May 2020

Sentiment driven lower by US/China trade tensions

What has happened

Despite many markets being closed on Friday for the Labour Day holiday this did not stop downside volatility. US technology earnings came in below expectations after the market close on Thursday which damaged sentiment particularly as technology has been more resilient to the pressures of coronavirus. The main factor driving sentiment lower however has been the resurgence in US/China trade tensions.

Why have US/China tensions flared

Donald Trump’s comments last week suggesting Covid-19 began in a laboratory in Wuhan helped stoke tensions and Michael Pompeo’s reiteration yesterday suggests this may not go away in the short term. The White House is said to have preliminary discussions to explore ways of ‘punishing’ China for its response to coronavirus though details are not yet forthcoming. There is talk of the US possibly cancelling its debt obligations with China which would effectively mean that China’s stockpile of US Treasuries is worthless. In reality we think this is unlikely given the knock-on impacts on the US dollar as the world’s reserve currency and US funding costs going forward. Larry Kudlow, Director of the US National Economic Council, as well as Donald Trump have denied this specific measure but tensions have clearly risen.

What might the US do

Joe Biden has accused Donald Trump of being ‘soft’ on China this means the US policy response to China will become a focus of the November election. This increased attention is likely to lead to increased threats of tariffs and with it, market uncertainty. The recent rally in US indices has given the Trump administration some breathing room to ramp up rhetoric as sentiment improves from the troughs of March. Donald Trump has already suggested that tariffs may be the ‘ultimate punishment’ for China and with the ink on the Phase 1 deal not yet dry we could see backtracking on the progress agreed so far.

What does Brooks Macdonald think

Given how much uncertainty the US/China trade war provided to markets in 2018 and 2019, this is undoubtedly a risk to watch through 2020. The White House will be keen to be proactively responding to perceived failings in the Chinese response but will equally be concerned about the economic recovery and stock market performance. Donald Trump will be well aware of the risks of increasing tensions whilst the economy is weak and stock markets still well off their highs. Should markets continue to show weakness this may test the appetite for pursuing China whilst much of the Western world is still in lockdown.

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