What has happened
It was a reasonably calm day for equities yesterday but in the last hour of the US session the spectre of US/China tensions rose again. This tension helped the US market close down after whipsawing in and out of positive territory throughout the day.
What is next for US/China trade tensions
Donald Trump has suggested that he will review the Phase One trade deal agreed with China earlier this year. Specifically the review will check whether China is delivering on its obligations to buy an additional $200bn of American goods over the next 2 years. This review is expected to coincide with a reassessment of the temporary license given to Huawei to operate in the US. We expect US policy towards China to be a key theme of the US Presidential election given Joe Biden has already accused Donald Trump of being soft on China. Whilst financial markets have bounced from their lows in March the broader economy remains fragile so any resurgence in tariff risks could lead to bouts of volatility.
No change for the Bank of England
The Bank of England made no changes to either the UK interest rate or to the scale of the quantitative easing programme. Whilst there was no change to the overall quantum of asset purchases the Monetary Policy Committee did note “that the stock of asset purchases will reach £645 billion by the beginning of July, at the current pace of purchases.” Given the economy and financial markets will likely still need liquidity assistance at this point, the Bank of England will need to reassess the current amount of committed capital. Sterling was broadly unchanged as markets expect this further accommodation in the months ahead, especially given the Bank has reaffirmed today that it “stands ready to take further action as necessary to support the economy.”
What does Brooks Macdonald think
US/China risk is one we are watching closely. It was a source of volatility in 2018 and 2019 so if we revisit a tariff war in the economic context of coronavirus it is unlikely to be taken well by markets. Whilst some escalation is likely given the political aspect, we expect Donald Trump to be wary of curtailing the nascent financial and economic recovery post the virus, this may limit any resurgence of anti-China rhetoric.