WeekWatch – ‘The US–China trade war looks increasingly hard to reverse’ June 2020
China’s first president, Sun Yatsen, was (he claimed) born in Hawaii, as, of course, was Donald Trump’s predecessor. These days, however, Pacific islands are helping to drive the two countries ever further apart, as recent days have shown. Last week, it was the US payrolls report that dominated immediate market movements, as strong jobs numbers combined with hopes for second-quarter growth to push US indices not far off all-time highs, although the boost to global markets was already subsiding by Monday morning. But the further widening of the US-China cleft may prove more significant for investors over the long term.
The US urged the UN to reject China’s claims in islands peppered across the South China Sea (part of the Western Pacific), while reports suggested the UK may yet swing in behind the US government’s push to block Huawei from Western markets – and delivery of 5G networks. Meanwhile, the prime minister said the UK would offer 12-month renewable visas (a path to citizenship) to around 2.9 million Hong Kong citizens, due to Beijing’s new national security bill – the US president said Hong Kong would no longer be treated differently to China.
The US House of Representatives, which voted on 27 May to sanction Chinese officials who try to choose Tibet’s next Dalai Lama, passed legislation calling for sanctions against China over mass incarceration policies in Xinjiang province. Last Friday, the Commerce Department imposed new restrictions on 33 major Chinese companies.
It all makes the US–China trade war look increasingly hard to reverse, even as lockdowns deepen de-globalisation. Rising political tensions did not prevent China’s CSI 300 or the US’s S&P 500 from rising last week – the latter especially benefited from US payrolls. But reports that the US president will now look to prevent US pension funds from investing in China could have significant market repercussions over time.
The US was dominated last week by anti-racism protests, sparked by the appalling death of George Floyd. The response appears to be enabling a more urgent public and political debate over racial inequalities.
Among those inequalities, employment ranks high. Last week, investors were focused on Friday’s US payrolls number – and were pleasantly surprised, as nonfarm payrolls rose by 2.5 million in May, after a record 20 million drop in April. It was the largest monthly rise on record. The falling US dollar has been helping US manufacturers and exporters alike, while some ex-employees have benefited from the temporary $600-a-head boost to US unemployment benefits (although a third of recent US jobless claims haven’t been paid. The US has also been aided by a massive fiscal stimulus, amounting to some 14% of GDP (larger than in Europe) as well as by Fed largesse).
“The US Fed has stepped in with unbelievable amounts of liquidity, expanding their balance sheet from three to seven trillion dollars in a very short time, but without that support, we could have been facing a Depression-style scenario,” said Hamish Douglass of Magellan, manager of the St. James’s Place International Equity fund. “If you had a credit crisis in the middle of this health crisis, it could have been an unmitigated disaster. Many governments have stepped in to protect companies and wages, in the hope many of these people will get their jobs back. The extent to which they come back is hugely unknown. It’s been an enormous cost but it’s been the right thing to do.”
Chinese indicators last week offered positives for investors. Although job searches are on the up, so are Chinese discretionary spending and construction. Corporate credit growth has also shifted into positive territory, although companies seem to be largely channelling it into boosting their depleted cash reserves, at least for the moment.
IHS Markit data showed China’s services sector returning to growth in May for the first time since January, while both mainland house sales and the Hong Kong economy are expanding. China’s share of oil sold in the Middle East, which was below 25% last year, crested above 35% in May. However, some disappointing Chinese trade data combined with poor German industrial data over the weekend to weigh on stocks in early trading this week, although the FTSE 100 is still up more than 30% from its March 2020 low.
A major positive surprise for investors last week came from the European Central Bank, which announced it would boost its bond-purchase programme from €750 billion to €1.35 trillion – a hefty rise. Intriguingly, despite ongoing arguments between member states over pooled liabilities, the allocation of bond purchases departs from the usual country-by-country allocations (known as the ‘capital key’), giving Italy an extra dose of help.
“It has become apparent that the ECB’s QE programmes are now being used to finance governments, with a bias to helping the member states that are being punished by markets for having poor debt dynamics,” said Azad Zangana, Senior European Economist & Strategist at Schroders, which manages the St. James’s Place Managed Growth fund. “As Christine Lagarde said, fiscal and monetary policy are now working together hand in hand. As a result, there is a good chance that the ECB expands and extends its programmes further at a later date, as it becomes clear that the public finances of Greece and Italy have become totally unsustainable.”
A further boost came in the form of a German fiscal stimulus worth €130 billion.
“The scale of Germany’s fiscal stimulus will provide an extra pillar of support for the eurozone economy, hopefully boosting consumer spending in Germany,” said Zangana.
In the UK, meanwhile, although mortgage applications have dipped below 2008-9 levels to their lowest since records began in 1993, UK services improved, and employment actually rose by 2.5 million, against expectations. Not that the government can rest easy; YouGov polls showed that 44% now disapprove of the current government’s record, against 35% who approve – a reversal in mood since early May. The FTSE 100 received a late boost from the US jobs report, with airlines and travel groups driving the rise on the prospect of lockdown loosening measures.
Magellan and Schroders are fund managers for St. James’s Place.
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