Where Are We Headed?
This weekly is on the early side and I am wary of what Friday brings, especially as the debt ceiling saga gives rise to further bond market volatility.
Investors’ immediate reaction may have been to check the stock market to see if it had lost steam since the US is considering taking action against TikTok as part of its strategy against China. As a reminder the app is owned by Bytedance, which is a Chinese company.
It turned out to be a false alarm and, to the relief of younger generations, TikTok is back up and running
Shortly both countries will be reporting second quarter growth figures and it might be the case that Chinese second quarter GDP measured in dollars will be higher than the equivalent number for the US. One can only assume that if this does indeed happen it will make Trump even angrier at China.
US-China Relations Barometer
In order to keep a handle of the tensions between the two superpowers, Goldman Sachs has created the US-China Relations Barometer (below). Currently this stands in the middle of the range at 47 – the barometer goes from 0 to 100 – so relations are tense but not as bad as a year ago when the barometer was in the nineties.
On a separate note, the clock is ticking on the fiscal cliff. As mentioned in last week’s update currently various benefits are being paid to US citizens but many of them expire at the end of July. Hence, it is important that Congress acts soon in order to keep the benefit cheques flowing. Action on this is sorely needed since the economic recovery in the US is now in danger of becoming more protracted as a result of virus numbers going in the wrong direction across certain US states. Over the past week, the US ICU Severity Index has risen from 19% to 30% as of this morning, a clear deterioration. Global stock markets, with the exception of China and NASDAQ, have been struggling to make much headway since June 8th and it appears that the virus is the reason why.
Focus Switches To US Election
Finally, the focus of this update will begin to focus more upon the US election as the campaign heats up. In a speech delivered yesterday at a metal works facility in Pennsylvania, Joe Biden made it clear that he will be trying to raise corporation tax from 21% to 28% if he has enough votes in the Senate should he win the Presidency. This is not new information but coupled with the statement that he wishes to see the end of the era of shareholder capitalism it was enough to send stocks a little lower.
As things stand, markets are finely poised between a possible strong recovery in global industrial production on the upside versus the uncertainties surrounding the virus and the US election. With this outlook, investors may wish to hold a meaningful allocation to equities but ensure that their risk-off assets are there to help dampen any volatility.
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