Tensions between the United States and China are likely to be a focus for financial markets, which is something that might have a bearing on the shape of the recovery.
President Donald Trump’s supporters have been running television advertisements attacking China, Politico reported.
U.S. Secretary of State Mike Pompeo has also made a series of accusations about China and the virus using relatively hostile language although without providing any evidence.
On Sunday, speaking on ABC, Pompeo accused the Chinese government of stonewalling any investigations and refusing to co-operate with experts and said there is “enormous evidence” that the coronavirus pandemic originated in a laboratory in the Chinese city of Wuhan, the BBC reported.
For investors, the issue is what this does to the U.S. and Chinese economies in the “Phase 2” bounce back.
The process of localization, which implies the unwinding of long complex global supply chains and producing closer to home, that was happening anyway, but is likely to be accelerated by the effects caused by the virus.
Investors should recall that this cannot happen that quickly however. Restructuring supply chains, especially where localization requires new investments cannot happen overnight.
We saw this last year when Trump’s aggressive trade tariffs led to an only limited supply chain restructuring, which meant that most of the burden of the tariffs fell on U.S. companies.
From an investors’ point of view it will be interesting to see “if” Trump continues attacking China, because if this would be the case, investors could start worrying about whether this will bring additional costs to specific U.S. firms.
In the meantime, on Friday we got the IHS Markit U.S. Manufacturing PMI that indicated an unprecedented contraction in production across the U.S. manufacturing sector that was caused by the measures that were implemented to contain the virus.
"When restrictions are lifted, demand should gradually revive, but the trade-off between risking a second wave of infections and bringing the economy back to life looks set to be one of the greatest challenges faced by policy- and lawmakers in recent history. The process will inevitably be led by caution, meaning recovery will also be frustratingly slow," said Chris Williamson, chief business economist at IHS Markit.
As an investor, I still would prefer to remain as realistic as possible and take a wait and see attitude. In my opinion, we haven’t seen the bottom in the markets yet as there is still worse to come. When that will be remains an open question.
Today in the euro area, we got the final data for the IHS Markit Eurozone Manufacturing PMI that shows the eurozone manufacturing economy contracted at a record pace in April coming in at 33.4 and down from 44.5 in March.
The PMI is indicating a Eurozone industrial sector that has collapsed and while steps are needed to keep workers safe will mean even businesses that are able to restart production will generally be running at low capacity, and most will be operating in an environment of greatly reduced demand, Williamson said.
Finally, for investors that have interests in euro based instruments it might be helpful to keep an eye at the decision tomorrow (Tuesday) of the German Constitutional Court on European Central Bank (ECB) bond buying purchases regarding the “legality” of these assets purchases.
Please take care, the ECB has not to follow the German law but this could be a serious obstacle at a time when the ECB is pretty much the only entity in the room you can depend on when it comes to coordinated European policy responses.
In the context of all this, Warren Buffett was, in my opinion at least, right when he said on Saturday during Berkshire Hathaway’s annual meeting that “You can bet on America, but you kind of have to be careful about how you bet.”
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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