by Brunello Rosa
13 July 2020
The number of Covid-19 cases worldwide is increasing. It has now nearly reached the 13 million mark, causing almost 600,000 reported deaths. Some countries, especially in Europe and Asia, are experiencing an increase in new cases, though only to a limited extent so far, after re-opening their societies following long periods of lockdown. In other countries, such as the US and Brazil, the situation is worse; according to some experts, infection rates may already be out of control in these countries. In the US in particular, where the number of cases has now reached 3.2 million, the spread of the virus is still increasing exponentially, suggesting that the adoption of new social-distancing measures is likely to occur during the next few weeks.
As lockdown measures have eased, economic activity has been picking up, recovering from the lows touched in Q1 and Q2. Unless restrictions are re-imposed to the same extent as occurred during the first part of the year, or new restrictions imposed upon large economies such as the US have massive spillovers to the rest of the global economy, Q3 GDP growth should show a positive figure in many countries, given base effects.
In spite of the recovery in economic activity, the support of economic policy remains essential. As far as fiscal policy is concerned, most governments are still providing stimulus by way of new or renewed packages. In the US, a third fiscal easing package is underway. In the UK, the Chancellor of the Exchequer has just announced a new set of measures to support economic activity, such as the temporary reduction of VAT on certain products and services and of the stamp duty on certain real-estate transactions.
In the EU, this week there will be another summit to make progress towards the approval of the EU Recovery and Resilience fund, which should support the economies most hit by the Covid pandemic, such as Italy and Spain.
In all this, central banks are taking a breather. In recent weeks, after the massive monetary easing programs announced during H1, most central banks are adopting a wait-and-see approach. Some of them, such as the Reserve Bank of Australia, have even started to reduce their intervention in markets as the economy stabilises. This week, there will be the monetary policy meetings of the European Central Bank (ECB), Bank of Japan (BOJ) and Bank of Canada (BOC). The BoC will release its first set of forecasts since the pandemic begun, and the BoJ will update its economic outlook. As we have written in our preview, we expect them not to change their policy stance, while remaining ready to add monetary stimulus should economic and financial conditions deteriorate in coming weeks.
Central banks, which have been at the forefront of the policy response during the global financial crisis, have already used most of their conventional and unconventional arsenal. At this point, they prefer fiscal policy, and regulation, to be in the driving seat. At the end of July, the FOMC of the Federal Reserve, which sets the tone for most central banks with its decisions, will meet. It is likely to adopt a similarly cautious approach, although with the worsening healthcare conditions in the US discussed above, the meeting might result in the decision to further increase its stimulus, for example by widening the depth and spectrum of its credit-easing facilities.
by Grégoire Roos and Brunello Rosa
2 July 2020
by Alessandro Magnoli Bocchi, Fawaz Sulaiman Al Mughrabi and Farah Aladsani
1 July 2020
by Brunello Rosa and Nouriel Roubini
25 June 2020
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by John Hulsman
14 July 2020
Introduction: The Oddest Creature In The Jungle
The Anglosphere is by far the oddest creature in today’s great power jungle. Not a country as China, the US, Japan, and India are, the major English-speaking portions of the former British Empire—united by a common tradition of English Common Law and the political and economic freedoms that flow from it—are not even as centralised as the EU. However, the Anglosphere’s institutional and geographical heterogeneity belie a practical geostrategic closeness that Brussels cannot begin to match.
That is because, in practical policy terms, the US, UK, Australia, New Zealand, and Canada act together so often that this most obvious of alliances is rendered almost invisible to the eye of political risk analysts. The Anglosphere alliance is simply the most important foreign policy reality that no one is talking about.
For example, and most tellingly, in all of the major geostrategic contests in the last tumultuous century--the First and Second World Wars and the Cold War—much like a bickering Butch Cassidy and the Sundance Kid, who nonetheless always came out of the fray shooting together—all the Anglosphere countries found themselves on the same side in every single contest. This record of strategic closeness is unparalleled, and it is not an accident.
Beyond marching in geostrategic lockstep on the big things, the Anglosphere economies are tightly bound together. In 2017, the combined economies of the US, UK, Canada, Australia, and New Zealand accounted for fully 30 percent of the world’s gross domestic product. Equally importantly, Anglo-Saxon economies tend, over the past generation, to be more dynamic than their European counterparts, growing year-on-year at a much more dynamic rate.
The five already invest very heavily in each other’s economies, which are densely interlinked. For example, the UK is the largest investor in US companies, with foreign direct investment (FDI) amounting to $540 billion. Likewise, the US is the primary investor in the UK, with accumulated stock of nearly $750 billion. At the same time, the UK is the second largest source of FDI in Australia, while also being the second largest recipient of Australian FDI in 2019. These economic bonds are likely only to grow now that post-Brexit London has regained its ability to cut its own trade deals.
Beyond geo-strategy and economics, in terms of intelligence matters the Anglosphere is already thesuperpower. The ‘Five Eyes’ amounts to the largest intelligence sharing consortium in the world. All five countries have openly and automatically shared signals intelligence since 1956, in turn targeting the Soviet Union, global terrorism, and now the rise of China. For instance, in June 2020 alone, the Five Eyes held at least four ministerial-level conferences (based on shared signals intelligence), looking collectively at the draconian new National Security Law Beijing has inflicted on Hong Kong.
For all these practical policy reasons, the Anglosphere is best thought of as the most important great power of which little is said in the modern world. And, with the rise of China, the Anglosphere has once again found a common enemy to tighten its already formidable bonds.
For each of the Anglosphere allies has come to the common realisation that China is a disruptive force on the world stage and must be balanced against due to different specific circumstances, but the cumulative effect has been the same. The Anglosphere—unlike an increasingly neutralist and divided EU—will come out riding together once again, this time to blunt China’s increasingly obvious expansionistic efforts.
The Bullying Of Australia
Rather bravely, given its increasing economic dependence on Beijing, the Australian government of Scott Morrison has asked needed, obvious, but pointed questions as to China’s role in the propagation of the COVID-19 virus. On April 19th, Foreign Minister Marise Payne forthrightly stated that Canberra would ‘insist’ on an independent international investigation into the origins of the virus, including looking at Beijing’s crucial actions in its early stages.
China, well aware of its complicity, took this effort at truth-telling for a full-frontal assault on it as a country. In its hysterical, bullying reaction it only confirmed the Morrison government’s fears that Beijing is a wrecking power out to subvert the current international order.
Hu Xijin, the editor of the state-run (and often bellicose) Global Times, responded to Canberra’s call for an investigation with striking language. On April 22nd, he thunderously stated that, ‘Australia is always there, making trouble. It is a bit like chewing gum stuck on the sole of China’s shoes. Sometimes you have to find a stone and rub it off.’ It is little wonder following such a blistering denunciation that Australia’s long-running debate over China’s motives has been decisively answered.
But nor were China’s threats merely rhetorical. On April 27th, China’s Ambassador to Australia, Cheng Jingye, openly suggested that Chinese consumers ought to boycott Australian wines, universities, and beef, all for having the effrontery of calling Beijing to account for propagating the virus. On May 18th, the Chinese government went further, taking direct economic action by imposing tariffs on Australian barley of up to a punitive 80% and banning large exports of Australian beef.
But, as has happened countless times in the past century, bullying efforts by other great powers merely stiffened the Anglosphere spine. On July 2nd, Prime Minister Morrison said he was ‘very actively’ considering offering safe haven to the people of Hong Kong fleeing the new national security law. In response, China’s Foreign Ministry said ‘Australia should refrain from going further down the wrong path.’
Undaunted, on July 9th, Morrison announced a significant change in Australia’s immigration policy, a practical action of support for the people of Hong Kong and an illustration of resolute defiance against Beijing. The new guidelines allow 10,000 Hong Kong residents in Australia on student or temporary work permits to remain in the country for an additional five years, at the end of which there will be a pathway to citizenship. Chinese bullying over Canberra’s call for an investigation into the genesis of the coronavirus has rallied Australia to the Anglosphere cause.
(This is an excerpt of Dr. Hulsman's latest article, which you can read here).
Dr. John C. Hulsman is the widely-read Senior Columnist for City AM, the newspaper of the city of London. Dr. Hulsman is also a Life Member of the US Council on Foreign Relations. His most recent work, the best-selling, To Dare More Boldly; The Audacious Story of Political Risk, was published by Princeton University Press in April 2018 and is available for order on Amazon. He can be reached for corporate speaking and private briefings at https://www.chartwellspeakers.com.
Week 13 - 19 July 2020
US Inflation Expected To Rise And Central Banks Likely To Remain On Hold
In the UK, monthly GDP data are likely to show a slight rebound in May (c: 5.0% m-o-m; p:-20.4).
In China, Q2 GDP figures are expected to return in positive territories (c: 2.1% y-o-y; p:-6.8).
In the US, June CPI is expected to rise by 0.6% y-o-y (p: 0.1).
In the EZ and Japan, the ECB and BoJ are expected to keep: i) key interest rates unchanged at 0.0% and -0.1%, respectively; and ii) maintain the size of asset purchases and other pandemic-related stimuli unchanged.
Covid-19 Infections Surge Worldwide; Deteriorating US-China Relations; EU Fiscal Initiative To Face Opposition
Worldwide, COVID-19 cases are on the rise, recording every day a new record; fresh outbreaks have led to: i) a re-closure of schools in Hong Kong; and ii) a re-imposition of selective lockdowns in Australia.
In the US, the three most populous states–Florida, Texas, and California–have seen record rises in COVID-19 related deaths, leading Dr. Anthony Fauci–the top advisor of the ‘US COVID-19 taskforce’–to recommend affected states to ‘seriously look at shutting down again’. According to President Trump, ‘a phase two trade-deal with China is not under consideration’ as the ‘relationship with Beijing has been severely damaged’. The recent comments reflect the steady breakdown of ties between the two nations over: i) the COVID-19 pandemic; ii) trade; iii) Hong Kong’s autonomy; and iv)competition for military supremacy in the South China Sea.
EU leaders are set to discuss a EUR 750bn recovery (EUR 500bn in grants, EUR 250bn in loans) to support most EZ-periphery economies, hit hardest by the pandemic. The plan faces opposition from the Netherlands, Sweden, Denmark, and Austria (the so-called ‘frugal four’ countries), which requested the proposal to be amended so that: i) only loans, which eventually have to be paid back, are offered; and ii) recipient countries eligibility remains contingent on implementing competitiveness-enhancing reforms to their labor, tax and pensions systems.
The UK said talks with the EU ‘made little progress’ as ‘significant differences still remain’ on a number of issues, including: i)accesses to British’s fishing waters; and ii) the future influence of EU courts. Without a deal, on January 1 the UK and EU will start trading on WTO terms with tariffs and quotas re-imposed.
Real Economy: Fresh Virus Outbreaks Threaten The Economic Rebound, CBs To Remain On Hold
In the US, as a result of the re-opening of the economy July’s non-manufacturing ISM/PMI–a measure of the direction and not of the magnitude of economic trends–jumped by 11.7pts to 57.1 (c: 49.5; p: 45.4). Weekly ‘initial unemployment claims’ fell slightly more than expected (a: 1.314m; c: 1.375m; p:1.413m). PPI–a gauge of inflation for producers–fell unexpectedly in June, as rising energy costs were offset by weakness in services (a: -0.2% m-o-m; c: 0.4; p: 0.4).
In the EZ, May retail sales surged by 17.8% m-o-m (c: 15.0; p: -12.1) with monthly gains ranging from 13.9% m-o-m in Germany to 37.0% in France. The large increase has regained most, but not all, of the recent losses: retail sales are still down -5.1% y-o-y. The EZ manufacturing sector also showed signs of recovery, with rising industrial output in: i) Germany (a: 7.8% m-o-m; c: 10.0; p: -17.5); ii) France (a: 19.6% m-o-m; c: 15.1.; p: -20.6); and iii) Italy (a:42.1% m-o-m; c: 22.8; p: -20.5).
In Australia, the RBA: i) kept interest rates on hold at 0.25%; and ii)maintained its yield target on 3-year government bonds at 0.25%.
Financial Markets: Treatment Hopes And Liquidity Lifted Equities, Bonds, Copper, Oil And Gold
Market drivers: hopes for a COVID-19 treatment overrode concerns that a rising number of infections could undermine the global recovery.
Equities: w-o-w, global stocks rose (MSCI ACWI, +1.7%, to 542), driven by US equities (S&P 500, +1.8%, to 3,185) - while EZ equities remained flat (Eurostoxx 50, +0.1% to 3,296). EM equities rose (MSCI EMs, +3.5%, to 1,069), lifted by a rally in Chinese equities (Shanghai Comp., 7.3% to 3,383) prompted by state-media endorsing a ‘healthy bull market’.
Fixed income: w-o-w, global debt indices rose (BAML Global, 0.4% to 296.6) and yields across DMs fell (10y UST, -4bps to 0.63%; 10y German Bunds, -4 bps to -0.47%). The yield on a 10y UST fell as low as 0.56% on Friday, over fresh lockdowns concerns.
FX: w-o-w, the USD weakened against a basket of currencies (DXY, -0.5% to 96.652).
Commodities: crude struggled to extend a recent rally as the IEA warned ‘the uptick of COVID-19 infections is casting a shadow over the outlook’ (Brent, +1.0% to 43.2 USD/b). Gold maintained its haven appeal (Gold, +1.3% to 1,798 USD/Oz.). Copper prices rose, given: i) supply disruptions; and ii)a robust recovery in Chinese manufacturing (LME, +6.6% to 6,319 USD/T.).
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