Weekly view – The summer grind

All kinds of reasons can be advanced for the tit-for-tat closure of the Chinese consulate in Houston and its US equivalent in Chengdu. These range from a dispute over quarantine requirements for US diplomats returning to China to an attempt by the Trump Administration to distract from troubling virus news and a real threat to American intellectual property and privacy. Whatever the case, the incident marks a further stage in the on-going decoupling of the US-China relationship, which seems to have accelerated since the onset of the covid-19 crisis. We expect further deterioration in relations as we move closer to the November elections, supporting our overweight position in gold. But while the blacklisting of Huawei could have further serious implications, at this stage we believe the essence of the ‘Phase 1’ trade deal signed at the start of this year will endure.

Even by EU standards the journey to the recovery fund agreement was bruising for all concerned. But the deal was worth waiting for. Certainly, conditions were set down and concessions had to be made that could raise issues further down the road, but the basis for making Europe investible again are there, justifying our preference for European assets and the euro versus the US dollar (including our decision to acquire euro call options). The change in sentiment has been evident for a few weeks already, with European assets outperforming their peers in the US, where the virus continues to proliferate, the recovery is showing signs of stalling and uncertainty surrounds a new emergency stimulus package to be discussed in Congress this week. After strong business sentiment figures last week, we expect to see data from the EU to continue to outpace data from the US in the coming weeks.

As we move into peak Q2 earnings, the vast majority of companies so far has managed to exceed very low expectations. But few companies are giving guidance, and we are already seeing some profit-taking among some tech-related highflyers. We believe the market will be range bound over the coming weeks, albeit with a large dose of volatility as analysts race to adjust their projections.