WeeklyWatch – US payrolls boost markets and sentiment, while tensions with China continue to rise

09 June 2020

Stock Take

The first president of China, Sun Yatsen, says that he was born in Hawaii, just like Donald Trump’s predecessor. Of course, these days the pacific islands are unfortunately helping to drive the two countries even further apart. The US payrolls report dominated immediate market movements last week, as strong numbers combined with second-quarter growth hopes to push US indices not far off all-time highs. However, the boost to global markets was already subsiding by Monday morning. It’s the broadening gap between the US and China that may prove more significant to long-term investors, though.

While the US urged the UN to reject China’s claims in islands that pepper the South China Sea (part of the Western Pacific), reports suggest the UK may back the US government’s push to block Huawei from Western markets, along with delivery of 5G networks. The prime minister also said the UK would offer 12-month renewable visas (a path to citizenship) to around 2.9 million Hong Kong citizens, due to Beijing’s new national security bill – meanwhile, the US president said Hong Kong would no longer be treated differently to China.

Even as lockdowns deepen de-globalisation, the US-China trade war is looking increasingly hard to reverse after the US House of Representatives, which voted on 27th May to sanction Chinese officials who try to choose Tibet’s next Dalai Lama, passed legislation calling for sanctions against China over mass incarceration policies in Xinjiang province. And last Friday, the Commerce Department imposed new restrictions on 33 major Chinese companies.

These rising tensions haven’t prevented both China’s CSI 300 and the US’ S&P 500 from rising last week, the latter especially benefitting from US payrolls. But reports that the president will now seek to prevent US pension funds from investing in China have some potentially significant ramifications over time.

America marches

Dominating America last week were anti-racism protests, sparked by the appalling death of George Floyd. The response appears to be enabling a more urgent public and political debate over racial inequalities, in a way not seen in recent years.

Employment ranks highly among those inequalities. Investors were pleasantly surprised by Friday’s US payrolls number, as nonfarm payrolls rose by 2.5 million in May, picking up after a record 20 million drop during April – becoming the largest monthly rise on record. The falling US dollar has helped both US manufacturers and exporters, and some ex-employees have benefitted from the temporary $600-a-head boost to unemployment benefits, although a third of recent jobless claims haven’t yet been paid. The US has also been aided by a massive fiscal stimulus, amounting to some 14% of GDP (larger than in Europe) as well as by Fed largesse.

“The US Fed has stepped in with unbelievable amounts of liquidity, expanding their balance sheet from three to seven trillion dollars in a very short time, but without that support, we could have been facing a Depression-style scenario,” said Hamish Douglass of Magellan, manager of the St. James’s Place International Equity fund. “If you had a credit crisis in the middle of this health crisis, it could have been an unmitigated disaster. Many governments have stepped in to protect companies and wages, in the hope many of these people will get their jobs back. The extent to which they come back is hugely unknown. It’s been an enormous cost, but it’s been the right thing to do.”

Chinese convalescence

There were positives for investors last week, offered by Chinese indicators. Although job searches are on the up, Chinese discretionary spending and construction is, too. Corporate credit growth has also moved to positive territory, although, at least for the moment, companies are largely channelling it into boosting depleted cash reserves.

China’s services sector has also returned to growth in May for the first time since January, shown by IHS Markit data, while both mainland house sales and the Hong Kong economy are expanding. And while China’s share in oil sold in the Middle East was below 25% last year, has risen to above 35% this May. However, some disappointing Chinese trade data combined with poor German industrial data at the weekend, weighing down on stocks during early trading this week. The FTSE 100, however, is still up 30% from its March 2020 low.

ECB boost

The European Central Bank gave investors a very positive surprise last week, when it announced it would boost its bond-purchase programme from €750 billion to a huge €1.35 trillion. And despite ongoing arguments between member states over pooled liabilities, bond purchase allocations depart from the usual country-by-country allocations (known as the ‘capital key’), which gives Italy some extra help.

“It has become apparent that the ECB’s QE programmes are now being used to finance governments, with a bias to helping member states that are being punished by markets for having poor debt dynamics,” said Azad Zangana, Senior European Economist & Strategist at Schroders, which manages the St. James’s Place Managed Growth fund. “As Christine Lagarde said, fiscal and monetary policy are now working together hand in hand. As a result, there is a good chance that the ECB expands and extends its programmes further at a later date, as it becomes clear that the public finances of Greece and Italy have become totally unsustainable.”

German fiscal stimulus worth €130 billion also became a boost.

“The scale of Germany’s fiscal stimulus will provide an extra pillar of support for the eurozone economy, hopefully boosting consumer spending in Germany,” said Zangana.

Going to the UK, mortgage applications have dipped below 2008-9 levels, the lowest level since records began in 1993, but UK services have improved, and the employment has risen against expectations by 2.5 million. But this doesn’t mean the government can rest easy; YouGov polls now show that there is 44% disapproval of the current government’s record while 35% approve, which shows a turnaround since early May. The US jobs report gave the FTSE 100 a boost late in the week, and airlines and travel groups are driving the rise on the prospect of lockdown loosening measures.

Wealth Check

Some parents think that COVID-19 costs will push up taxes on wealth and are acting accordingly.

Tax rises to fund the £300 billion borrowed during the pandemic could be announced as part of the Autumn Budget. With government revenues falling sharply in May, “talk has inevitably to the likelihood of future tax rises to help repay the debt pile; more so given the government’s reluctance to return to austerity or impose major public spending cuts,” said Tony Wickenden, Director of Technical Business Development at St. James’s Place.

The largest sources of government revenue1 – Income Tax, National Insurance and VAT – were ringfenced in the government’s election manifesto, meaning any changes would be politically risky. But the possibility of a new wealth tax, along with Inheritance Tax and Capital Gains Tax, could be in line to be raised.

“Inheritance Tax generates around £5-6 billion a year,” said Wickenden. “Even doubling that, it would take many years to make a dent in the government’s debt. That doesn’t mean the change won’t happen, though.”

The fear over these potential rises are prompting some to gift assets to family members now, taking advantage of tax reliefs that could soon change. Others have brought their legacy payments forward, and the effects of the pandemic mean changing financial situations for many families.

It’s important to consider the impact on your retirement plans when giving money to loved ones earlier than planned. Recent market movements may have changed the real value of your retirement plot, which means you could end up giving more than you can afford. It’s best you speak with your Wellesley Adviser to ensure that any payments aren’t to the detriment of your long-term financial goals.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

1Source: HMRC Tax and NIC receipts, April 2020

In the picture

The encouraging 2.5 million rise in US employment numbers in May is a step in the right direction and boosted stocks late last week, as investors had been expecting a further fall. The direction of travel is important, even if the rise barely registers next to the 20-million drop suffered the month before.

The Last Word

“Many people in Hong Kong fear that their way of life – which China pledged to uphold – is under threat. If China proceeds to justify their fears, then Britain could not in good conscience shrug our shoulders and walk away; instead we will honour our obligations and provide an alternative.”

– Boris Johnson, who last week announced that, if Beijing introduces its new security laws, almost 3 million Hong Kong residents will receive 12-month UK work permits – a route to UK citizenship.

Magellan and Schroders are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations.

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

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