Square Mile Market Update

30 July 2020

By Jason Broomer, Verbatim Square Mile Model Portfolio Manager

While stock markets globally remain very alert to any developments related to Covid-19, it is interesting to note that despite the emergence and acceleration of the infection rate of the virus, particularly in the southern states of the US, the market reaction to any economic implications has been subdued. This is very different to the response in March when this situation was still unfolding. On this occasion it seems that markets recognise that Covid-19 and the ongoing disruption to the global economy it is causing will be with us for some time and are therefore exercising more restraint.

However, we have concerns over the growing political risk, particularly in the run-up to the US presidential elections which are due to take place in November. President Donald Trump is now lagging well behind in the polls and he is likely to take steps to address this. In the past, he has engineered crises to side-track the US electorate and to generate an environment which is more in his favour and no doubt he would welcome any distraction from his management of the Covid crisis.

International relations with China have been steadily deteriorating. Tensions have existed for a number of months, ranging from Donald Trump banning direct flights by Chinese airlines into the US to ongoing issues surrounding technological theft which most recently resulted in the closure of some Chinese consulates in the US. There is talking of banning platforms such as TikTok from the US and Donald Trump is going as far as taking steps to prevent the US government pension fund from direct investment in Chinese stocks. All this paints a bleak picture of the worsening relations between the US and China. Donald Trump may well seize the opportunity to exacerbate this situation and cause a crisis to distract from those issues where he is not on such comfortable ground.

Of course, China does not only face international relations problems with the US. It is has received widespread criticism over its implementation of its National Security Law in Hong Kong. This has led to a souring of relations with the UK in particular. At the same time, China has fallen out with Australia over trade and has almost come to armed blows with India over a border dispute. China is therefore on the backfoot politically speaking and Donald Trump may well act to exploit this state of affairs for his own political ends. This is something that we will be monitoring closely over the coming months.

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