Overview
With new developments arising over the respective regions, here are our market highlights for last week.
China
China lifts restriction for foreign asset management firms amidst US-China tensions
On August 21, the China Securities Regulatory Commission (CSRC) has mentioned on its website that Blackrock is allowed to operate in Mainland China through a wholly-owned subsidiary in Shanghai. This means the US asset manager becomes the first global asset management company to win regulatory approval to establish their own mutual funds in Mainland China. Before the regulatory approval, Blackrock was only able to work in China in a mutual fund venture with the Bank of China (BoC).
Many analysts treat this as a sign at which the Chinese government is actively trying to increase its competitiveness during the current periods of Sino-American conflicts. This may indicate that the Chinese government is willing to further open its 17.7 trillion yuan ($2.58 trillion) market to international corporations.
In light of China’s opening-up, Blackrock is hardly the only asset management firm that is taking advantage of the trend. Earlier this week, Vanguard, which is a large asset management firm with $6 trillion in assets under management, has announced that it is pulling out of Hong Kong and Japan in favour of making Shanghai its regional headquarter in Asia. Vanguard’s spokesperson said the retreat from Hong Kong will involve job cuts in a long period of two years, as the city “was unfavourable to individual investors, the primary focus of the firm.” It is believed that Vanguard is eyeing the huge base of retail investors in Mainland China, similar to what many asset management firms are planning to do.
Japan
Japanese Prime Minister Shinzo Abe Resigns
Shinzo Abe resigns as the country’s longest serving prime minister due to health reasons. Abe has been suffering from ulcerative colitis, an inflammatory bowel disease, for many years and it was the same disease that had caused him to step down as premier back in 2007.
Abe will remain in power until his successor is chosen. The leaders of the Liberal Democratic Party have yet to hold an internal vote, which may be held on September 15th, to choose a successor. The general election will not take place until October 2021.
Moving forward, Japan now faces many challenges as a new leader is stepping up for the first time in almost 8 years. Abe had built strong ties with Donald Trump over the course of the years. The two leaders have even played golf together a few times. Japan has been successful in cementing its position as the leading U.S. ally in Asia and has not seen any unilateral withdrawals of U.S. troops. Shihoko Goto, a senior associate for Northeast Asia at the Wilson Center, attributes Japan’s ability to stay away from Trump’s wrath as one of Abe’s successes.
EU
Germany leads the way for Eurozone’s economic recovery
Firstly, Germany’s economic contraction was less severe than estimated. Earlier this month we noted that Germany’s quarter-on-quarter GDP for Q2 in 2020 was -10.1% but fortunately last week, Germany’s official statistics office revised it to -9.7% instead.
Last week, Germany’s economic outlook was further boosted by improved business sentiments for the 4th consecutive month. In the Ifo institute’s Business Climate Index for Germany, which is a closely followed leading indicator for Germany’s economic activity, we saw a 2.2 points increase from 90.4 points in July to 92.6 points in August. This survey also showed that business climate improved considerably in manufacturing, especially the export-focused manufacturing sector while service providers were decidedly happier with their current business situation.
Germany’s economy appears to be doing better than other European economies. A Financial Times analyst attributed this to shorter and less strict lockdown, stronger government support and lower reliance on hard-hit industries such as tourism.
With the largest economy in Europe recovering well, we can expect the other economies to do so as well. However, the market continues to be wary about COVID-19 resurgence as lockdowns continue to ease in the region as it could put a halt to current economic improvements.
United Kingdom
BoE’s assurance of ample fire
Last Friday, BoE governor Andrew bailey spoke at the virtual Jackson Hole conference where he sought to assure markets that Central banks have sufficient resources to tide through the recession. Moreover, he stated that quantitative easing and forward guidance are the two best tools to be used in times of financial stress. Additionally, Bailey noted that as economic conditions improve, its asset purchase program would need to gradually unwind to ensure adequate assets for future crises. However, given the current climate, it is unlikely to happen in the near future and we can expect the BoE to maintain its accommodative stance.
Meanwhile, on the Brexit front. informal talks between the two parties concluded with little development again. They remain deadlocked over the same key issues with neither one is willing to make concessions. Perhaps, only when we approach the deadline will there be enough political push from both sides to make concessions and find a common ground. Thus, any other brexit talks from now can be expected to remain inconclusive until mid September.
Lastly, the UK is set to revise its laws to allow the emergency use of any effective COVID vaccine available as long as it meets the required safety and quality standards. There has not been any significant pick ups in cases so far which might pave the way for further unwinding of lockdown measures.
Overall, it has been a fairly muted week for the UK on the macro side of things. Looking ahead, next week the focus will turn to the release of August PMI as we look to see how much improvement there is from the previous month.
United States
Fed Policy Announcement
On August 27th of 2020 the speech from Federal Reserve Chair Jerome Powell was highly anticipated as he would reveal how the Fed’s policy would change given the current circumstances. The Federal Reserve’s monetary policy this year has mainly been aimed at keeping interest rates low in order to keep money moving in in light of the pandemic and the impending recession. However the Fed’s two main tasks are to keep employment up and inflation low. Usually there is a bit of a tradeoff with high employment leading to high inflation and this would be controlled with high interest rates. In the last decade however employment has risen whilst inflation has stayed in the target of 2%. In developed countries such as the United states the target inflation rate is 2% as it was deemed as a healthy enough annual increase to ensure that the economy is growing at a good pace.
The Fed announced that they will in fact allow temporary moderate increases above the target rate of 2% inflation. This will only further show that the Fed intends to keep interest rates at near 0 levels for years to come and show that it is shifting its focus to employment rather than calming inflation unless it deems it fit to do so. The policy is also intended to help boost the labour market which is one of the main reasons the fed intends to tolerate an above 2% inflation level but it must be stressed that the Fed is not looking for a large deviation away from their usual 2% target and these periods of moderate inflation will only be temporary and not major.On the topic of employment the Fed Chair stated that the Fed will now base its policy decisions on “assessments of shortfall of employment from its maximum level rather than deviations from its maximum”. The Fed has been dovish when it comes to policy this year due to circumstances that the world over is facing and they believe any form of tightening will be to the economies detriment.
The M Word 