With new developments arising over the respective regions, here are our market highlights for last week.
China
SMIC could be added to the list of Blacklisted Chinese firms
On Friday, a Defense Department official said the Trump administration is deciding whether to add Semiconductor Manufacturing International Corporation (SMIC), China’s largest chipmaker, to the US’s trade blacklist. This could signify an escalation of the crackdown on Chinses companies, just a month after 24 Chinese companies and targeted individuals were added to the list due to construction and military actions in the South China Sea.
The spokesperson mentioned that the Defense Department was working with other agencies to determine whether to make the move against the scrutinized firm. If SMIC is added to the list, businesses with US entities will be much more difficult as all U.S. suppliers will be forced to seek a difficult-to-obtain license before shipping to the company. A person familiar with the matter said in this stage, the stances of other agencies, such as the State and Energy Departments and the Commerce Department, are still not clear.
In recent months, the Trump administration has often used the trade list, which consists of over 275 Chinese firms, to achieve foreign policy goals such as oppressing China. The list now contains Chinses companies in key Chinese industries, from telecoms giants such as Huawei Technologies and ZTE, to surveillance camera maker Hikvision.
While the officials did not outline the reasons for the action, it is believed that SMIC’s relationship with the Chinese military is under scrutiny. This is in line with the administration’s increasing focus on Chinese companies that mingle with the Chinses army. In the past month, the US Defense Department has released two lists of Chinese companies that are allegedly owned or controlled by the People’s Liberation Army, making them potentially susceptible to be put in an even tougher blacklist.
While SMIC is the largest chip manufacturer in China, it is second-tier to industry leaders such as Taiwan Semiconductor Manufacturing Co Ltd (TSMC). With the potential blacklisting of the company, SMIC may not be able to enact its grand plans to catch-up and compete with TSMC, despite the former hiring former-TSMC employees in recent weeks.
Interestingly, the US-China ordeal has been a mixed blessing for the company. Initially, when the US prohibited US chip-manufacturers to supply computer chips for Huawei, it was initially thought to be hugely beneficial to SMIC as Huawei now needs to rely more on Chinses manufacturers. However, the recent news of putting SMIC into the trade blacklist could harm the company instead.
EU
Uncertainty ahead for the Eurozone as Euro appreciates and deflation hits
Last week, the European statistical office (Eurostat) announced that August’s inflation rate is estimated to be -0.2%, way below the market’s consensus of 0.2%. For the first time in 4 years, inflation is in the negative zone, showing that the rebound of economic activity we saw in earlier weeks has been insufficient in reviving the economy.
Secondly, the Euro has risen around 8% in the last six months, breaking $1.20 level for the first time in two years. This exacerbates deflation as imports become cheaper during currency appreciation and pushes overall prices down. Furthermore, export prices are increasing, putting even more pressure on this export reliant economy. If the Euro continues appreciating, European exporters will feel the brunt of this currency appreciation.
As such, markets are expecting the ECB to cut inflation forecasts, increasing pressure on the ECB to carry out larger stimulus. The burden lies with the ECB who has to make the decision whether to do more to turn the economy around, such as increasing its pace of purchases under its €1.35tn emergency bond-buying programme that they slowed previously.
Although we saw last week that Europe’s largest economy appears to be doing relatively well, would Germany be sufficient to pull the Eurozone economy away from a deeper recession?
UK
The road to recovery remains strong
August manufacturing PMI came in at 55.2 which was higher than 53.3 in July which recorded its strongest growth in factory activity since February 2018. Services and composite PMI rose to 58.8 and 59.1 respectively, both marking an improvement from July’s figure. Overall, the numbers paint a positive recovery which is largely driven by the increase in demand. The further easing of lockdown measures and the EatOutToHelp scheme has accelerated the pick up in business activity. Adding onto this is a survey from the Office for national statistics which reported an increase in the number of workers returning to the office from 30% in June to 50% in August. Moreover, schools have reopened which means that we can expect business and consumer activity to rise further in the following months. Thus, this could reduce the impact to the UK’s recovery road when fiscal support starts to gradually taper off.
Meanwhile, the BoE’s monetary policy committee concluded their meeting with not much new developments. Negative rates still remain a tool best left in the toolbox while QE is evidently the preferred choice followed by Term Funding Scheme. Since the UK’s current measures have been showing signs of recovery, adopting something entirely new might rock the boat unnecessarily.
Looking ahead, Brexit talks parties reconvene next week to continue another round of talks although we expect little breakthroughs despite the October deadline drawing closer.
United States
Both candidates hit the road this week, who is winning and how will it impact the US economy in the future?
Mr. Biden is favorable to win the upcoming presidential election, which will be held on 3rd November 2020. Several national polls between two parties depicted that Mr. Biden is leading President Trump from 7-10 percentage points. Specifically, Mr.Biden is winning in Arizona state by 9 points, 8 points in Wisconsin and 4 points lead in North Carolina. Despite the small margin differences, which favors Mr. Biden, lots of resources claim that the margin will grow wider, remembering the criminal justice that has impacted the US stability.
However, this does not mean that President Trump does not stand a chance in winning the Presidential election in November. Under President Trump’s leadership, the US GDP is continuously above the 1% benchmark, and the market soars. For instance, Dow Jones has reached a record high under Mr. Trump’s administration. Moreover, analysts believe that his tax cuts, together with US-focused policy, are behind the US economy’s success under President Trump’s reign.
In contrast, throughout the campaign, Mr. Biden also emphasizes its tax programs (increasing payroll tax from 37% to 39.6%), contradicting Mr. Trump’s 2017 tax cuts. Therefore, it is believed that if Mr. Biden won the election and the US market will crash as all the funds will move from the United States to other regions like Asia and Europe. On the other hand, if President Trump successfully maintains his position, markets will continue to soar and reach another record high.
The M Word 