Last Week in the City: US-China tensions escalate

Garry White, Chief Investment Commentator, provides a round-up of the market movements and the global investing outlook this week ending 24 July.

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  1. Garry White

Precious metals prices soared as the US urged the world to face-off with China. US Secretary of State Mike Pompeo said: “If the free world doesn’t change Communist China, Communist China will change us”. The military activity also picked up in the South China Sea. The earnings season continued, with companies posting mixed results.

The FTSE 100 was down 2.3% over the course of the week by mid-session on Friday. The FTSE 250 was little changed from the prior Friday.

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COVID-19

The US on Thursday recorded more than 1,100 deaths from COVID-19, marking the third straight day the nation passed that major milestone. Even though deaths are rising in the United States for a second week in a row, they remain well below levels seen in April, when 2,000 people a day on average died from the virus.

Face coverings are now compulsory in takeaways, banks and post offices as well as shops, supermarkets, indoor shopping centres and stations in England. Coverings, such as cloth masks or bandanas, must be worn when buying food and drink to take away, but if sitting down and consuming their purchase in the same premises, a customer can remove their face covering in order to eat and drink.

China plans to provide a $1bn loan to make its COVID-19 vaccine accessible for countries across Latin America and the Caribbean, the Mexican foreign ministry said. The news comes amid a sharpening of rhetoric between Beijing and Washington, increasing geopolitical tensions.

Economics

There was good news for Britain’s beleaguered retailers. UK retail sales jumped back almost to pre-pandemic levels in June when non-essential stores in England reopened. Sales volumes in June leapt by 13.9% from May, above all expectations. Clothing sales jumped 70%, with online sales soaring by 31.8%. However, with unemployment expected to rise in the coming months once the government furlough scheme ends on 31 October, questions remain over whether this is sustainable. Currently, the government is paying 80% of more than 9 million British workers’ wages, but the unemployment rate is steady at about 3.9%.

Advanced country governments have found it easy to increase their borrowings at very low-interest rates, but they can’t make a habit of borrowing such large sums. This week we looked at whether the level of government debt is a problem, in our article "Government borrowing is large but not yet a problem"

After much disagreement, the EU made an important move towards a bigger budget, with shared financing and transfers to the poorer countries. This week we looked at the EU budget implications, in our article "The EU presses on with budgetary union" 

Geopolitics

Relations between the US and China took another turn for the worse. The US ordered China to close its consulate in Houston, Texas, by Friday – a move described as "political provocation" by Beijing. US Secretary of State Mike Pompeo said the decision was taken due to China “stealing” intellectual property. In retaliation, China ordered the US to close its consulate in the city of Chengdu.

Mr Pompeo also made a provocative speech, calling on “free nations” to triumph over the threat of a “new tyranny” from China. “Today China is increasingly authoritarian at home and more aggressive in its hostility to freedom everywhere else,” Pompeo said. “If the free world doesn’t change Communist China, Communist China will change us,” he said.

The US justice department accused China of sponsoring hackers who are targeting labs developing COVID-19 vaccines. Officials charged two Chinese men who allegedly spied on US companies doing coronavirus research and got help from state agents for other thefts. Garry White looks at how China is using cyber warfare to exploit the COVID-19 pandemic here.

Vodafone chief executive Nick Read said Britain's decision to ban China's Huawei from its 5G network should not be extrapolated to the rest of Europe, because there were different geopolitics at play in other countries.

Tensions are building in the South China Sea over waters claimed by China. The Chinese navy held a live-fire drill and also confronted Australian warships.

Brexit

EU Brexit negotiator Michel Barnier said a trade and security deal with the UK by the end of the year appeared “unlikely”, as he complained that Britain was demanding “near total exclusion” of European fishing boats from its waters. As well as fishing rights, there is no agreement about ensuring neither side drives down regulatory standards or is able to unfairly subsidise their businesses. UK’s chief negotiator, David Frost, concurred that there were “considerable gaps” but insisted that an agreement could still be reached in September.

Reports also suggested that the UK had abandoned any hopes of a US trade deal this year, as the covid-19 pandemic and US election interfere with progress. However, the US Senate Finance Committee warned Britain this week that its digital service tax on American technology companies could put a post-Brexit trade deal at risk. Talks will resume next week.

The Alternative Investment Market (AIM)

Last month London’s junior market, AIM, celebrated its 25th birthday; but do investors understand the market – and how many are celebrating happy returns? James Rae explains all here.

Technology

The US outlined a plan to build a “parallel quantum internet” that could be used by sensitive government departments and banks to send information that cannot be hacked. The network will rely on the laws of quantum mechanics to transmit data more securely. It could be functional in a decade, according to the US Department of Energy. 

Energy

Oil prices edged higher, supported by a weaker dollar, though tensions between the US and China limited gains. Brent crude prices rose 1.2% over the week by mid-session on Friday to trade at about $43.65 a barrel.

Mining and commodities

Silver has been making headlines with the precious metal up 16.6% this week. The explosive move higher, akin to the 2011 price action, can be traced back to the influence of Robinhood accounts in the US. Robinhood is a US commission-free trading app and has attracted a significant amount of novice investors, deemed “hoodies”. The number of “hoodies” holding SLV, the main Silver ETF in the US, increased 33% in a matter of days.

Autos

Tesla chief Elon Musk briefly became the world’s fifth-richest person at the start of the week, as Tesla share price continued to soar. The electric vehicle maker has become a favourite of Robinhood traders, with the “hoodies” help pushing the shares up by almost 262% so far this year.

Travel

Ryanair will shut its base at Frankfurt Hahn airport after German pilots voted to reject pay cuts. The company said its bases at Berlin Tegel and Dusseldorf airports were also at risk of closure by the end of the summer. Ryanair's UK pilots and cabin crew recently voted to accept pay cuts to reduce job losses.

Property

Summer property sales in the UK were nearly a third lower than last year per data collated by HM Revenue and Customs (HMRC). Sales were down 31.5% on the same month a year ago, but up 50% from May. Chancellor Rishi Sunak announced a temporary holiday on stamp duty on the first £500,000 of all property sales in England and Northern Ireland in his summer statement last month in an attempt to boost the market.

As people have got used to working from home and demonstrated their ability to still do their jobs, the outlook for expensive offices in major conurbations is changing. Garry White looks at the issue here.

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