Still Waters Running Deep
On the surface, last week was rather dull, not least in global financial markets.
However, there were some intriguing political and economic developments, which I have featured in recent editions of Economic Insights and on which I expect regularly to comment in the coming months:
Almost universal acceptance, after a surprisingly prolonged period of stout denials by many politicians and sell-side bankers and brokers, that COVID-19 is not going to go away soon.
The global economy, which was faltering before the virus struck, is not going to recover soon. Even the more self-reliant economies will struggle to recover fully: including the US, China and those in East and South East Asia. The UK is looking especially vulnerable, whatever concessions it manages to wring from the EU.
President Trump is continuing to dig himself into a hole domestically but still seems determined to disrupt international trade, thereby presenting President Xi with the dilemma of nationalistic retaliation or supporting, subtly and covertly, Mr Trump’s re-election.
The Fed and other officially independent central banks seem increasingly willing to subordinate monetary policy to fiscal policy, including the suppression of interest rates to ease public borrowing costs.
Despite the surge in activity by day traders, especially in the US and China, a momentum investment strategy is losing its impact as institutional investors look for more convincing opportunities. There is increasing evidence of reshuffling portfolios within and between different equity markets. In recent weeks there have been flows out of the US and into China, South Korea, Malaysia and even Germany.
As these developments seem set to continue the appetite for bonds with negative real yields is likely to diminish if and when the economic disruption from COVID-19 starts to ease. Borrowers will have to pay more, especially if there are any doubts on their creditworthiness. There is also surely a limit as to how long investors will be overweight in cash. This bodes well for equities with plenty of money available in the almost inevitable looming dips, if not outright corrections. However, few individual stocks, including the US FANGs and China’s BATs, will be spared if either or both their results and share prices lose momentum. With the Fed so determined to hold down interest rates the dollar seems likely to give ground generally rather than only to the euro or yen, while Gold should continue to benefit and equities outside the US attract more interest.