What has happened
The US outperformed yesterday despite a continued pick up in new cases that means the number of cases is now only 2-3,000 a day behind its peak in March and April of this year.
Misspeaking on the trade war
Overnight there was what could be generously referred to as some misspeaking from White House trade adviser Peter Navarro. After saying that the Phase One trade deal was ‘over’ he followed up by saying ‘this election is going to be about jobs, China and law and order.’ Within the hour Navarro backtracked from this and said he was making a broader point on ‘trust’ rather than saying the deal was over in practice. US Equity index futures took this news poorly which is not surprising given that the central market narrative is that neither the US nor China would benefit from tearing up the deal at this juncture. Donald Trump also response via a tweet to say ‘The China Trade Deal is fully intact. Hopefully they will continue to live up to the terms of the Agreement!’ Markets responded to this and index futures rose back into positive territory. Whilst there was no particular harm to sentiment as a result of this it was a reminder that the White House contains some senior China hawks.
What does Brooks Macdonald think
The rapid sell-off in US futures is a sharp return to the risks of a US/China trade war. Whilst second wave risks are rightly at the front and centre of investors’ minds, a Sino-US escalation has the possibility of upending the geopolitical backdrop at a time when the global economy can ill afford it. Given the impact of this risk in 2019 where the economy was in relatively fine fettle, a revisiting of deglobalisation during a resurgence of case growth in the US would be highly unwelcome for risk assets. Over the last week the market has seen a greater amount of two-way investor sentiment however on days where news flow stays under broad control the liquidity support from fiscal and monetary stimulus is allowing equities to rise.