Please see below Monday Digest article received from Tatton Investment Management this morning, which provides a global market update as we begin September.
US stocks were weighed by tech last week, but the UK and Europe were reasonable. Britons suspect a capital gains tax (CGT) hike in autumn – which is keeping advisers busy but hasn’t had any effect on UK stocks, and we expect that non-reaction to continue. Yields seem to be trending down to pre-pandemic levels – despite being up last week.
Nvidia’s profit results were even better than expected – but apparently not good enough for investors, with shares dropping 6% on Thursday. This seems to be more about souring AI sentiment in general, following an accounting fraud allegation against Super Micro Computer – sending the AI darling’s stock down 19%. SMC is Nvidia’s third biggest customer, so the timing was awful. Broader US stocks thankfully didn’t follow Nvidia’s lead, gaining on some positive economic data.
Economic positivity begs the question of whether rates need to fall, though. Fed char Powell was very dovish in his speech last weekend, and we suspect it is 50/50 whether the Fed cuts by 25 or 50 basis points in September. But the US has solid consumption and no credit stress, so some think this is unnecessary. The point isn’t that the US is weak, but that it’s in a delicate position – particularly with regards to unemployment. Cutting now pre-emptively makes sense. Growth is steadier in the UK and Europe – because it wasn’t as strong before – but rates should still fall.
Markets seem to be treating the US election as irrelevant. It clearly isn’t, but we think it makes sense to act like it is because things are so uncertain. Not only is the outcome itself on a knife-edge, but nobody can work out whose policies would be better or worse for the US or global economies. Trump will cut taxes and boost short-term growth, at the expense of global trade and fiscal stability. Harris might raise taxes, but maintain the status quo and boost investment. Markets aren’t excited about either and, since investors are notoriously bad at reacting to elections, ignoring this one feels reasonable.
Why investors look so much to the US
We are UK based, but we write more about US markets than the UK – and we are not alone. The simple reason is that US stocks account for 61% of global market
cap, compared to just over 3% for the UK. Less obvious is why the US market is so big. It’s the world’s largest economy in nominal terms, but its 26% share of global GDP is well below its stock market share, and it trades less with the world than China. Its market cap share has soared over the last decade, but its GDP share has been virtually flat.
US economic activity matters more to global stock values than anywhere else, though. The biggest companies in the world are US tech firms – due to American corporate and economic structures, and the dollar’s global reserve status. Those firms are disproportionately sensitive to the US economy: Amazon gets more than two thirds of its revenue from the US. The US economy largely dictates what happens to the world’s biggest stocks, and those stocks largely dictate what happens to global capital markets.
There is a limit to how US-centric global markets can become, but the party doesn’t have to end anytime soon if US firms can continue their profit leadership (by leading AI innovation, for example). The problem is that this requires a continual flow of capital into the US – and we have argued that this could be under threat from isolationist or tech-busting policies. Huge government debt – which both presidential candidates seem eager to expand – also requires capital, which might have to come out of stock markets. That could temper international investors’ American enthusiasm.
We talk so much about the US because it’s as great as it’s ever been in capital market terms. That dominance isn’t immediately threatened, but nor is it inevitable.
Easing liquidity tightness made in China?
The Chinese renminbi (RMB) has strengthened against the dollar, in stark contrast to the previous stasis. This could be a sign that the currency’s headwinds are fading, giving the People’s Bank of China room to ease policy – to the benefit of the Chinese and global economies.
Domestic demand has been weak for a while and exporters have been struggling. The textbook response would be to weaken the currency and export out of trouble, but the PBoC kept the dollar rate stable. In the context of a stronger dollar and much weaker yen that effectively meant restricting financial conditions and hampering growth. The rationale, it seems, was that devaluing the RMB would incur US and European tariffs, and undermine confidence in the currency domestically and abroad.
Recent RMB strength is a sign that those pressures are fading: it actually depreciated against the yen, euro and Vietnamese dong, and Chinese industrial profits have improved. It also helps build confidence among Chinese citizens, who were previously buying gold to avoid holding their own currency. Chinese citizens notably aren’t using this patch of RMB strength as a gold-buying opportunity.
This doesn’t mean the RMB will strengthen further – and in fact we expect the PBoC to try and weaken a little to previous levels, as they already seem to be doing. This means the bank can effectively loosen financial conditions without fear of undermining currency stability. That could be a huge boost for domestic demand and, therefore, global growth. Any support will certainly be mild (the age of Beijing’s ‘bazooka’ support is over) but we shouldn’t underestimate its importance. There are suggestions that PBoC tightness contributed to the August liquidity shortage – along with the infamous yen ‘carry trade’ unwind. If that liquidity drain is plugged, it at the very least removes a headwind for markets.
Please check in with us again soon for further relevant content and market news.
Chloe
02/09/2024