With new developments arising over the respective regions, here are our market highlights for last week.
China
US-China Trade Dispute: Investment Falls to Lowest in 10 Years
Capital flows between the world’s two largest economies have dropped to the lowest in almost a decade, particularly driven by political tension and the coronavirus pandemic. As of the first half of 2020, investment flows between U.S. and Chinna totaled $10.9 billion. This is a record low since 2011.
US-China tensions exacerbated following the outbreak of coronavirus. The trade dispute between the two countries has worsened and there is a fear of a so-called cold war looming over the U.S. and China. Stephen Orlins, the president of the National Committee on US-China Relations, stated that the current relationship between U.S. and China is worse than any period he had experienced and that includes the period after the Tiananmen Square Massacre in 1989. There is a long list of issues with high tensions that need to be resolved for the two countries to look eye to eye.
While the investment flows have been at a low point, it would have been much lower if not for the deal where Tencent purchased $3.4 billion worth of stake in the Universal Music Group. The cross-border investment between the two countries peaked in 2017 at $37 billion and has declined ever since.
EU
Are the banks okay?
Last week, the chairmen of UBS and Credit Suisse (CS) were reported to be exploring a potential merger, consolidating both banks into one of Europe’s largest banks. UBS Chairman was also reported to have discussed this deal with the Swiss Prime Minister. If this merger goes through, it will lead to around 15,000 job cuts within the two banks, as well as less jobs in the Bulge Brackets (BB) in general as there will only be 8 BBs remaining.
This merger is attributed to the pandemic which led UBS and CS into worsening credit quality and demand, especially in their wealth management and investment banking departments. Furthermore, the stock market correction earlier in the year took a toll on both banks’ assets under management. This potential deal was met with resistance forces as well, as a top investor at one of the banks mentioned that he “cannot see the logic” in a full merger.
In other news, other banks beyond Switzerland are facing similar problems, leading to job cuts as well. Deutsche Bank resumed job cuts in August, with a plan to cut another 1200 people over the next 2-3 years; HSBC’s job cuts were reported to be up to 35,000 employees around the globe; Nomura has cut IBD jobs in Dubai and moved the middle east coverage to their London team; Citi looks to restart its layoff plan.
UK
Paving the way to negative interest rates
In last week’s Autumn meeting, the Bank of England left all its policies unchanged. Bank rates were held at 0.1% and their asset purchase programme remained at £745bn. Policy tightening will not be happening anytime soon until spare capacity is being eliminated while the 2% inflation target is being achieved in a sustained manner as noted in the MPC’s forward guidance. However, negative interest rates seems to be more firmly on the table now given that the policy meeting minutes revealed the MPC were briefed about plans on how it could be effectively implemented. Moreover, the BoE will begin preparations for NIRP by having a “structured engagement” with regulators. While such a move signals that negative interest rates is a step closer to reality, we still retain the view that it is unlikely to be implemented in the near term. Given that Haldane and Bailey have repeatedly mentioned their preference for QE over negative rates in the previous bank meetings and more recently, the Jackson Hole Symposium, it seems like the BoE is just laying down the foundation for when a situation actually calls for it.
Elsewhere, on the Covid front, the UK has reported a surge in new cases for the past two weeks. The number of new cases have doubled every week (3395 as of 17 Sept vs 1295 on 1st Sept) which have pushed the R rate to 1.7, indicating a continued increase in numbers in the following weeks. Hospitalisation rate and death rates are still relatively low, however we expect the figures to pick up soon. The resurgence has led to the proposal of a second national lockdown with an estimated duration of two weeks and a tentative date around mid October to coincide with the half term holidays. Currently, cases are mostly concentrated in the north region where restrictions are already in place in cities like newcastle etc. However, should the government impose a nation wide lockdown, there would be severe implications to the economy since it is a service driven one and would be a headwind to the recovery.
Lastly, Brexit wise, it seems like a deal is still on the table as EU commission president Leyen is reportedly “convinced it can be done”. This comes after the proposal and then passing of the UK’s internal Market Bill. While the bill may have passed the first round, there are still a few more stages it would need to be approved in order for the bill to be formally introduced into the judiciary system. As the soft deadline draws closer, we can expect more of such developments to arise as part of a negotiation tactic.
After seeing the euro appreciate to a record level and deflation in the Eurozone economy, markets were eager to know ECB’s response and some investors were hoping for additional stimulus into the economy to bring the euro down. Concurrently, some market experts did not expect any policy changes by ECB as there was not much room to lower interest rates and they also cited that euro appreciation stemmed from weakening of the USD.
So what exactly went down during the ECB meeting on Thursday? There was extensive discussion by the central bank and they have concluded that interest rates were to be left unchanged and will carefully monitor the exchange rate. Christine Lagarde added though that the exchange rate was “not a policy target” and even announced that the ECB had raised its forecast for 2021 inflation and economic growth. This hawkish stance from the ECB, coupled with their seemingly dismissive stance towards inflation, took the markets by surprise and even caused the euro to increase towards $1.20 again. As the euro appreciates against the dollar, it will continue to weigh on the already negative inflation.
Moving forward, if the euro continues to appreciate and weigh on the already negative inflation rates, and the ECB continues its current stance, things will not look good for the Eurozone economy.
The M Word 