Weekly View - High stakes in fragile environment
The impact of the disappointing upturn in new covid cases was promptly reflected in weak economic data in the European PMI figures for August. Governments are for the time being ruling out another full-blown lockdown but the shift in sentiment was apparent in more cautious views expressed this week by the ECB and indeed the Fed (in spite of a slowly improving covid situation in the US). At this point markets remain highly dependent on continuing monetary and fiscal policy support.
Meanwhile, with the virus effectively suppressed, the Chinese economy gives every impression of a return to business as usual. China will, however, need to negotiate a notably more sceptical economic environment, typified by the new measures against Huawei coming from the US last week and the forced sale of TikTok’s US operations. China-US relations continue to deteriorate and we appear to be moving from a “trade and tech” war to a new phase that looks like a potential “capital war”.
The speed with which Apple recovered to reach its landmark USD 2 trillion dollar valuation was astonishing (it took 32 years to reach one trillion, and 5 months to reach a second). But while US stock indexes hit record levels, less than 6% of companies have reached a 52-week high. As the US reporting season ends, numbers were better than feared, yet we remain underweight equities at these demanding valuations and in the face of considerable uncertainty.
At the Democratic convention Joe Biden promised (if elected) to be the light that would lead the US out of the “darkness”. The level of economic darkness come November will to a large degree depend on the ability of legislators to agree on continuance of support for businesses and consumers and a materially reduced package seems the best that can be expected. With election stakes higher than in living memory, we turn this week to the Republican convention and the following TV debates (as well as the virtual Jackson Hole). These events have perhaps unprecedented relevance this time around and will be watched with keen eyes for sector implications and pointers on fiscal policy.