2 June - update from our investment partner
- 2nd June 2020
What has happened
Markets continued their rally yesterday with the US markets rising to their highest level since the pandemic started, perhaps more impressively, US Technology is just 3% away from the all-time highs set in February. This is despite generally negative news around an escalation in the US protests as well as comments from China.
US agricultural goods purchases in jeopardy
According to reports, Chinese government officials have told state-owned traders to stop their purchases of some US farm goods. This raises a question over the future of the Phase One trade deal and appears to be a response to the hawkish message from Donald Trump’s press conference. The key question here is whether this type of story is enough to convince the White House to escalate. Our base case is that whilst there is clear political capital accrued in being tough on China, the US will be uncomfortable tearing up the Phase One Deal given the promised purchases of US agricultural goods and negative economic consequences. Should China effectively renege on their end of the bargain however, it will be tough for Washington to merely look on.
Europe rumbles on
Sources close to the ECB have suggested that the Pandemic Emergency Purchase Programme, the most recent quantitative easing programme, may not be extended this month. The suggestion was that to do so may be seen as ‘panicky’ given we are just 3 months in to a 9 month programme. Interestingly whilst Bunds sold off as a result, peripheral debt actually saw spreads narrow suggesting that the markets still believe the ECB will need to extend at some point. The quest for a recovery fund also continues with the Frugal Four set to issue their list of objections to the European Commission’s proposal over the next few days. In amongst all of this, the UK/EU trade talks restart with market expectations low of a breakthrough pre the 30th June deadline for extending the transition period.
What does Brooks Macdonald think
Should China signal that it is not willing to carry on purchasing US agricultural goods in the face of rising US rhetoric, this may be a game changer for US/China risks. The Phase One deal does allow for ebbs and flows in the purchases of goods so the reports above may not suggest China are looking to slowly default on the deal. Should this happen however market attention will quickly turn back to tariff risks.
All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.