Overview
With new developments arising over the respective regions, here are our market highlights for last week.
China
Chinese market reforms
President Xi Jinping vows to liberalize and open up the world’s second-largest economy. With the rising tensions between U.S. and China as well as the U.S.’s bill to delist Chinese companies, many US-listed Chinese stocks are returning to Hong Kong and/or China for a secondary listing. China’s reform took place as a new trading venue in Shanghai, also known as the Star board, which was launched and started trading exactly a year ago. Since its launch, the Star board has helped 130 companies raised a total of $30 billion over the past year. More spotlight to be shined on the board with high-profile companies including Jack Ma’s Ant Group to be listed.
United Kingdom
Is UK in a precarious situation?
Last Friday, the UK reported better than expected flash July PMI figures with manufacturing coming in at 53.6 (52.0 exp), services reporting 56.6 (51.5 exp) and composite notching 57.1 (51.1 exp). While actual figures did beat expectations, consensus estimates reflect a rather bleak outlook on the economy as an average of 51.5 implies an expectation for a very modest expansion. Given that the majority of the service sector has reopened at the start of the month coupled with Sunak’s reduction of VAT, one would expect estimates to be much higher. Meanwhile, total consumer spending fell 13% compared to June suggesting that the public still remains cautious.
On the Brexit front, officials are still in a deadlock over the same issues. While there were no breakdowns in talks, there were no breakthroughs either suggesting a lack of political will to push things through. The EU is the UK’s biggest trading partner collectively after the US. However, a deal has not been struck with both parties which puts the UK in a precarious position as the Autumn deadline is looming and the end of the transition period is drawing closer. A deal with the US is unlikely to materialise this year and after souring its relations with China, it seems like the UK needs the Brexit deal more than its counterpart. Perhaps, the increasingly unfavourable situation for the UK might very well be the push it needs to get things done.
Overall, the UK is not in a good position. Domestically, numbers are not picking up fast enough despite the various schemes introduced earlier this month with spending and crowd mobility still far below pre-pandemic levels (-28% according to google mobility report). Bolstering public confidence remains key in raising consumer spending in order for recovery to pick up so as to cushion the impact when fiscal unwinding begins. Uncertainty is amounting and with all the key events stacking up in autumn, August is the month where we need to see the government committing to more than just table talks.
EU
Historic deal made at the EU summit
After a marathon summit that lasted more than four days, the historic deal was finally announced in the early hours on Tuesday. The EU leaders had agreed on both the EU budget (€1.074tn) for 2021 – 2027 and EU recovery fund (€750bn), where the union will borrow up till the stated amount on capital markets until 2026 and will only be effective on 1 January 2021.
Just last week, the tension amongst the EU leaders made the deal seemingly impossible. Fortunately, both parties of the debate compromised and concluded that the recovery fund will give out €390bn of grants and €360bn of low-interest loans. A “collective responsibility and solidarity” was evident from this deal, where the leaders were determined to ensure the EU’s recovery of the EU from the COVID-19 crisis.
As a result, both US and European markets rallied on Tuesday. S&P 500 recorded its third consecutive day of gains; EuroStoxx 600 increased by 0.3% and DAX increased by 1%; Euro climbed to an 18-month high against the USD.
According to ING, more vulnerable countries like Italy and Spain will receive larger grants at 2.5 – 3.5% of GDP while stronger economies like France and Germany will receive 0.4 – 0.5% of GDP in the next 2 years. In the long run, this fund will stimulate economies decently, especially those that were more vulnerable going into the COVID-19 crisis. Furthermore, this deal should take some pressure off the ECB in terms of COVID recovery.
United States
US-China tensions scaled new heights
As the presidential election topic is heating up in the states, the tension between the United States and China has heated up. On Friday (24th July 2020), the United States have announced the closure of the Chinese consulate in Houston, Texas, within a timeframe of 72 hours. This action was claimed to be due to China’s alleged intellectual property theft and poor handling of COVID-19. In response with the action, China also announced the forced closure of the United States embassy in Chengdu, China, in the same time frame of 72 hours.
This tit for tat all began with a trade war that saw the US begin by adding tariffs on Chinese goods in a bid to boost its own economy as they felt they were not getting a “fair deal”. This Trade war was then de-escalated with a deal signed by both parties with China buying large amounts of US exports. However, recent developments caused the US to punish China by banning Chinese security screening firm Nuctech, imposing visa restrictions on Chinese officials held responsible for Hong Kong’s new national security law, banning Huawei and placing 90-day limits on work visas for Chinese journalists. Hence, this tension will significantly affect the world economy remembering the fact that both countries are two of the biggest economies in the world.
The M Word 