Weekly market recap: clash of the titans

Equity traders are setback amidst an new wave of US-China tensions.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 24th July 2020

A US woman who began a trading challenge with a hairpin has exchanged her way to a minivan – and doesn’t plan on stopping until she gets a house! Demi Skipper, 29, started a challenge (where she is forbidden from using cash or trading with anyone she knows) where she had to start with a hairpin and keep swapping the item for incrementally more value items each time.

Unfortunately, equity traders were not as successful last week as US-China tensions came to a head. Asset class returns are below; with the US ordering the closure of a Chinese consulate and the expulsion of its staff, China’s tit-for-tat response has stoked fears in investors that we may be seeing the start of a fresh wave of US-China tensions.

Source: Bloomberg

Source: Bloomberg

It should be no surprise that during an election year the incumbent US President looks to his base, considers what issues might be a ‘vote winner’, and does what he can in a hurried attempt to shore up core support ahead of polling day. At least, that is the current school of thought for many commentators trying to rationalise the actions of the Trump administration in recent months, as being “tough on China” becomes a key part of Trump’s campaign message. However, this view misses the nuance of the situation which has continued to evolve over the last two and a half years with the two sides exchanging body blows over trade.

But again, from the perspective of the US administration, this tension is more than just about trade; it’s about economic supremacy. For the last seven decades the US has dominated its economic rivals, whether that be the Soviet Union (1950-1990s) or China in the 1990s. However, this all changed with China’s admission to the World Trade Organisation in 2001 and the start of a trend to globalisation in which large portions of the global manufacturing base relocated to China.

Figure 3: While the US has dominated its rivals for decades, the rise of China is a direct challenge to its economic supremacy 

Source: Maddison Project Database

Today, China is no longer just the world’s low cost manufacturer; instead it leads the world in numerous high-tech industries ranging from life sciences to the digital economy. The rise of the Chinese middle class has also been a significant contributor to its economic rise as the Chinese Communist Party undertakes an economic rebalance away from manufacturing and more towards consumption-led growth.

Given this context, the US decision last week to close China’s consulate in Houston, Texas and subsequently expel its staff bears more significance than it just being election year and that Trump needs to “look tough” for his voter base. Accusations from the hawkish Trump administration claim that the Chinese consulate was engaged in systematic espionage with the aim of deeply penetrating US-based scientific research and broader commercial activity. This plays into one of the key claims of the 2018-present trade war that China has been stealing US intellectual property to advance its own technological progress.

While the situation has been flaring up for a number of weeks, previously ambivalent markets have only just begun to price in the reality of what fresh US-China tensions could mean at a point in time where the global economy is already on its knees from the coronacrisis. Should escalations between the two economic titans continue, fresh economic uncertainty will begin to once again impact the capital allocation decisions of corporates who in turn may look to alter the geography of existing global supply chains.

While Figure 5b shows that it’s not just Trump and the Republican Party that are likely to take this hard line approach with China, some commentators speculate that a possible Biden administration may want to take a lighter approach should the Democrats win the White House later this year. It’s therefore highly likely that we could see further pullbacks in equity markets as tensions with China begin to resurface.


STAT OF THE WEEK: 66.3%, 41.2%, 29.5% – the proportion of Chinese, black and white UK state school pupils aged 18 who are offered a university place (UCAS).

DATA CORRECT AS AT: 24/07/2020

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Contact Tertius

    Tertius Bonnin

    Tertius joined EQ in 2016 and is responsible for covering global and thematic equity investment ideas. He also sits on both the fund selection and strategic asset allocation committees while also supporting the portfolio managers across a range of other responsibilities.

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