Yesterday TikTok, the well-known app used by people much younger than us, stopped working in some parts of the world. Our immediate reaction was to check the stock market to see if it had lost steam since, as you might know, the US is considering taking action against TikTok as part of its strategy against China. As a reminder, the app is owned by Bytedance, a Chinese company. It turned out to be a false alarm and, to the relief of our children, TikTok is back up and running.
Shortly, both the US and china will be reporting second quarter growth figures and it might be the case that Chinese second quarter GDP (measured in dollars) will be higher than the equivalent number for the US. We can only assume that if this does happen it will make President Trump even angrier at China.
In order to keep a handle on the tensions between the two superpowers, we have started looking at the newly created US-China Relations Barometer as calculated by Goldman Sachs (below). Currently, this stands in the middle of the range at 47 – the barometer goes from 0 to 100 – meaning relations are tense but not as bad as a year ago when the barometer was in the 90s.
Source: Goldman Sachs, 05/07/2020
On a separate note, the clock is ticking on the US fiscal cliff. As mentioned in last week’s update, various benefits are currently being paid to US citizens with many of them due to expire at the end of July. Hence, it is important that Congress acts soon in order to keep the benefit cheques flowing. We think this is sorely needed as the US economic recovery is now in danger of protracting as a result of virus numbers increasing across certain US states. Over the past week, our Optimus Capital US ICU Severity Index has risen from 19% to 30% (as of this morning), indicating a greater share of the US population lives in states where ICU capacity is at low levels. Global stock markets, with the exception of China and the NASDAQ, have been struggling to make much headway since June 8th and we think the virus is the reason why.
In future updates we will devote more space to the US election as the campaign heats up. In a speech delivered yesterday at a metal works facility in Pennsylvania, Joe Biden made it clear that he will seek to raise corporation tax from 21% to 28% if he has enough votes in the Senate should he win the Presidency. This is not new information but coupled with the statement that he wishes to see the end of the era of shareholder capitalism it was enough to send stocks a little lower.
As things stand, we think markets are finely poised between a possible strong recovery in global industrial production on the upside, versus the uncertainties surrounding the virus and the US election on the downside. For this reason, we have a meaningful allocation to equities but all our usual hedges are in place.
