The relationship between the United States (US) and China is highly complex. The two countries have a history of both cooperation and rivalry which spans decades. They are dependent on each other for trade, investment, military alliance, and cultural exchange. However, in recent years, tensions between the two nations have arisen due to economic disputes, technological advancements in fields like artificial intelligence and 5G networks, as well as geopolitical issues, like North Korea’s nuclear programme.
China’s friendly stance towards Russia since its invasion of the Ukraine has exacerbated these tensions. On Tuesday, the US issued a direct warning to China, stating that it would target any Chinese firms or individuals who are assisting Russia with any “lethal aid” in their war against the Ukraine. The US state Secretary, Antony Blinken, stated that China cannot “have it both ways”. This statement followed repeated reports that the US intelligence community is in possession of information proving China is actively considering sending lethal aid to Russia.
While military conflict with China is unlikely, the US will not steer away from imposing economic penalties. “We will not hesitate, for example, to target Chinese companies or individuals that violate our sanctions, or otherwise engage in supporting the Russian war effort,” Blinken said.
This conflict between two powerhouse economies, not only poses a threat to global growth and geopolitical stability, but also escalates the US’s internal political tension, as the relationship between the US and China remains a highly debated matter in Congress. In an interview with CBS News on Sunday, Republican Representative, Mike Gallagher, warned that it’s about more than strategic competition between two countries, and that the type of world we will occupy in the future will depend on the action that is taken against China now.
The strained relationship between China and the US also has a profound effect on the rest of the world, with economic effects that ripple across the globe. Additionally, it has led to increased tensions in areas that were previously relatively peaceful such as the South China Sea and East Asia. This discord can also serve as an impediment to global cooperation in areas like trade and climate-change mitigation efforts.
DATA IN A NUTSHELL
The economic sentiment indicator in the euro area edged down to 99.7 in February, well below market expectations of 101. Sentiment weakened among manufacturers, falling to 0.5 from 1.2 in January, and with service providers, where sentiment fell to 9.5 versus January’s 10.4. However, there was an improvement in some sectors’ sentiment: traders’ climbed to 0.1 from -0.7 in January, consumer rose from -20.7 in January to -19, and constructors’ from 1.4 in January to 1.8.
Durable goods orders in the US, which measures the cost of orders received by manufacturers of goods, contracted by 4.5% month-on-month in January, its biggest rate of contraction since April 2020. The number of Americans filing for unemployment benefits fell by 2,000 from the previous week to 190,000 for the week ending 25 February, coming in below market expectations of 195,000.
The latest reading remains close to the nine-month low of 183,000 at the end of January, giving further evidence that the US labour market remains tight, which is in part due to reduced labour force participation. A shortage in labour can see employers raising wages to attract and keep staff, however, wage increases are further adding to inflationary pressures in the US economy.
The Caixin China General Manufacturing Purchasing Managers’ Index (PMI) increased to 51.6 in February, up from 49.2 in January, outperforming market consensus of 50.2. This was the first increase in factory activity since July 2022, and the highest reading in eight months, following China’s shift in its zero-COVID policy. Output grew for the first time in six months, with the rate of expansion its steepest since June 2022. New orders expanded for the first time in seven months, and at the fastest pace since May 2021, with new export orders also rising for the first time in seven months.
INFLATION AND INTEREST RATES REMAIN CENTRE STAGE
Stock futures contracts tied to the blue-chip Dow Jones traded mostly sideways on Thursday, while those linked to the S&P 500 and Nasdaq were down 0.3% each, as signs of resilient economies raised the odds of higher-for-longer policy rates. Several US Federal Reserve (Fed) policymakers, including Atlanta Fed President, Raphael Bostic, and his Minneapolis counterpart, Neel Kashkari, reinforced their hawkish stance by saying that interest rates will need to be hiked further to rein in inflation. The downward market movement came in tandem with an uptick in US Treasury yields, the 10-year benchmark holding above 4%, pressuring technology and other high-growth stocks. On the corporate side, automotive and energy company, Tesla, plunged more than 6% in premarket trading as Elon Musk’s “Master Plan 3” fell short of details, while cloud-based software company, Salesforce, jumped over 15% on better-than-expected guidance.
London equities came under selling pressure on Thursday, with the FTSE 100 again falling below the 7,900 mark. The biggest loser on the FTSE 100, Beazley, dropped more than 4% after the British insurer said that net profit fell 48% in 2022. The London Stock Exchange Group announced plans to seek shareholder approval for a buyback directed at shares owned by Blackstone and Thomson Reuters.
European stocks cut some losses to trade mixed on Thursday, after consumer price index numbers in the euro area came in above market expectations. Data indicated that the region’s inflation eased to only 8.5% in February, compared with market consensus of 8.2%, while the core rate hit a fresh record high. Meanwhile, European Central Bank (ECB) President, Christine Lagarde, said that rates will have to rise, and stay higher for some time, to combat inflation. Markets are fully priced for an ECB 50 basis point hike this month, and are leaning towards another 50 basis point hike in May. On the corporate front, Germany’s Merck KGaA said its 2023 earnings would slip due to a decline at its electronic chemicals unit as well as a drop in COVID-related demand.
Japan’s Nikkei 225 Index shed 0.06% to close at 27,499 while the broader TOPIX Index lost 0.16% to 1,995 on Thursday, giving back some gains from the previous session. Japanese equities are facing pressure from rising US Treasury yields as investors recalibrate their expectations for the likely peak in US interest rates. Investors also digested data showing Japanese companies raised spending on plant and equipment by 7.7% year-on-year in the fourth quarter of 2022, while consumer confidence edged higher in February.
OIL AND COPPER CLIMB AMID CHINESE ECONOMIC OPTIMISM
West Texas Intermediate Crude futures steadied near $78/barrel on Thursday as investors weighed hopes for a rebound in Chinese demand against concerns about further policy tightening from the Fed. Oil prices gained nearly 1% on Wednesday, after data pointed to robust manufacturing and services activities in China, while top executives from Chevron Corp and Saudi Aramco also signalled optimism about Chinese demand. Elsewhere, Russia recently revealed its plans to cut oil exports from its western ports by up to 25% in March, exceeding its previously announced output curbs of 500,000 barrels per day.
Gold eased toward $1,830/ounce on Thursday, snapping a three-day advance as investors continued to agonise about the prospect of further monetary tightening from major central banks. Gold is highly sensitive to the rates outlook, as higher interest rates raise the opportunity cost of holding non-yielding bullion.
Copper futures jumped above $4.10/pound, rebounding sharply from the near-two-month low of $3.95/pound touched on 27 February, as strong economic data for China pointed to a sharp recovery in the country’s industrial sector. Persistently tight supply also supported copper prices, as production stoppages in major South and Central American regions compounded concerns about low inventories in the US and Europe, adding to views that copper markets could be heading towards a deficit. Besides mining deferments in Peru, caused by political unrest, ore processing operations in Panama have recently been put on hold due to government tax and royalty payment issues from Canada’s First Quantum Minerals.
HAWKISH CENTRAL BANKS SET THE TONE
The US Dollar Index strengthened above the 104 mark on Thursday, recouping some losses from the previous session, as Fed officials indicated that more work needs to be done to bring down inflation. Meanwhile, the greenback fell half a percent on Wednesday after facing pressure from robust Chinese manufacturing data and hot German inflation data. Investors also reacted to the latest ISM Report on Business which showed that the US manufacturing sector contracted for a fourth consecutive month in February.
The euro traded softer at $1.062 on Thursday, after gaining 0.8% in the previous session, which marked its biggest gain in a month. The latest data showed that inflation in the eurozone slowed less than expected in February, but some investors were already expecting a surprise acceleration in the headline figure after unexpectedly strong readings in Germany, France and Spain. In addition, the core inflation rate hit a new record high, increasing bets the ECB will need to raise rates higher than previously expected.
The pound held above $1.19 this week, following a depreciation of more than 2% against the greenback in February, its biggest monthly decline since the near 4% drop in September 2022. Investors welcomed Britain’s agreement with the EU on post-Brexit trade and will give lawmakers a greater say over the rules and regulations they follow from Brussels. Meanwhile, the Bank of England (BoE) is expected to raise rates by a further 25 basis points next month, before ending the current tightening cycle. Monetary Policy Committee (MPC) member, Jonathan Haskel, said last month the BoE needed to be “really, really careful” about the risk of high inflation becoming embedded, while fellow MPC member, Silvana Tenreyro, said rates were already too high and she might consider voting for a cut in future meetings.
The pound started the day trading at 1.1941/$ and 1.1271/€.
Written by Citadel Global Director, Bianca Botes
© Peregrine Wealth Ltd
This publication has been compiled for information purposes only and does not take into account the needs or circumstances of any person or constitute advice of any kind. It is not an offer to sell or an invitation to invest. The information and opinions in this publication have been recorded by Peregrine Wealth Ltd in good faith from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness or correctness. Peregrine Wealth Ltd accepts no liability whatsoever for any direct, indirect or consequential loss arising from the use of this publication or its contents. Peregrine Wealth Ltd (registration number 39538) is licensed by the Guernsey Financial Services Commission.