Overview
With new developments arising over the respective regions, here are our market highlights for last week.
China
The U.S. – China Dispute over the South China Sea
The U.S. – China tension rises yet again, and this time it may be leading to a cold war between the world’s largest economies. China’s claim on the South China Sea as its very own lake has been rejected by the United States as well as international peers that surround the body of water.
This is an unusual move given that the US usually does not get directly involved and they sit on the passive side despite having a military presence there (freedom of navigation patrols). However, this just seems to be an evolution of the current trade narrative that the Trump administration is playing out in a seemingly attempt to shift attention away from the US COVID-19 situation. As the election draws near, we can expect more anti-china rhetoric coming from Trump. Still, we will continue to monitor the developments closely as China might retaliate much harder should the US cross the line.
Hong Kong
Mainland professionals in Hong Kong faces a hefty tax hike
This week, China imposed a new tax regime on its global citizens working outside of China which caught many off guard. For those working in Hong Kong, they now face a tax rate as high as 45% up from 15% previously. Many are now considering moving back home to avoid getting squeezed by the new levy and the sky high living costs despite earning 25% more than their counterparts in Shanghai.
This comes after China’s state-owned enterprises (SOE) made it compulsory for mainland professionals in the city to declare their 2019 incomes so that they can start paying taxes. Additionally, the implementation of the new national security law has already sparked fears among locals and non-chinese expatriates, prompting an outflow of talent and resources. Initially, this outflow was thought to be offset by mainland talents but this tax hike have exacerbated fears of a “brain drain” instead.
Despite this, there are still a considerable number of mainland professionals who are determined to remain in Hong Kong until they obtain a permanent identity card. To cushion the blow, some companies are considering increasing salaries and providing temporary cash relief for affected staff. But for now, Hong Kong still remains “a better environment for the job that they do” and will likely continue to be so unless more negative development arises.
United Kingdom
Economic data looking grim
The release of this week’s key economic data paints an overall grim outlook on the UK’s economy. While the June CPI figure rose by 0.6% YoY beating expectations of 0.4%, it should come as no surprise given that lockdown measures were eased and small businesses were allowed to reopen in the same month. Moreover, upon closer inspection, retail sales and recreation are still far below pre-pandemic levels according to the Google mobility report (-36% compared to baseline).
Meanwhile, at a glance, the unemployment rate of 3.9% might come across as positive news and that the UK labour market has somewhat “stabilized”. Unfortunately, reality is far from the truth as more than 9 million jobs have been furloughed since the start of the pandemic. Notably, furloughed workers do not fit into the official International Labour Organisation (ILO) definition of unemployment and thus, these workers are not recorded and included in the statistics reported. Therefore, it is not an accurate reflection of the current underlying conditions.
All in all, the labour market is now heavily propped up by the government wage schemes which will eventually end in January 2021. Unless there is an extension of existing measures, unemployment is expected to surge starting from October once the furlough scheme starts to wind down. If things do not start to pick up faster, we might see the Bank of England adopting a more aggressive stance in the next autumn meeting.
Europe
Spotlight is on the much awaited EU summit
Disclaimer: This article is written before the end of the 3rd day of summit.
This week, there were mixed sentiments in the European market ahead of the EU summit. While the market does not expect unanimous agreement of the EU recovery fund, some investors were confident that there will be an agreement on basic principles of the fund as Merkel was seen to be highly determined to push for an agreement.
The figure above summarises the key points of disagreement between EU member countries. The Frugal Four – Netherlands, Austria, Denmark and Sweden stands in opposition to most of the proposals by Germany and France. In particular, the Dutch Prime Minister insists on a national veto over the spending of recovery money. This led to tensions with other capitals, evident during a heated exchange with Bulgarian leader over dinner.
EU leaders find themselves in a deadlock even after 2 days at the summit. As member countries failed to bridge their differences, marathon negotiations ran into a third day. This summit has reflected deep-seated EU divisions over economic policies, potentially hampering Eurozone’s economic recovery.
This morning, Germany’s Merkel warns of summit failure on the EU recovery fund. Even though investors were expecting a no deal, the potential delay in economic recovery could cause stock markets to open lower on Monday.
United States
New vaccine development
Last Tuesday, Moderna reported new developments of their vaccine (mRNA-1273) in phase 1 of their study. Patients injected with the vaccine were observed to have a more “robust” immune-system response. However, more than half of the participants experienced side effects such as increased fatigue, chills, headaches and muscle pains. These symptoms worsened after the second injection even though it is not life threatening.
Yet, on Wednesday’s open, there was a gap up in equities index which essentially reversed the previous day’s massive sell off. If anything, such medical news especially during this period tends to evoke a knee-jerk positive response. One should be aware that any medical product would have to undergo several steps in a clinical trial before it can be approved and be made publicly available. Such a process takes time and therefore, investors should be cautious in dealing with this type of news.
The M Word 