• Market themes

Japanese stocks have led the rally in recent weeks, followed by continental Europe. This reflects a rotation of investor interest, from growth stocks (eg, technology) into more economically-sensitive cyclical stocks. However, the more modest gains of the U.S stock market over the same period have still enabled the NASADAQ to record a new high, and the S+P500 has seen a new intra-day high. Refreshingly, the U.K stock market has shared in the August rally, as have global small cap stocks.

Modest returns from some of the larger emerging markets (eg, China and South Africa) have limited the overall contribution of EM equity to investors’ returns so far this month. Investors are perhaps pausing for breath, after three months of outperformance against developed word stock markets. Sentiment towards Chinese stocks has been affected by President Trump’s recent onslaught against the owners of the Tick Tock and WeChat apps.

Meanwhile fixed income markets remain steady, with the yield on U.K gilts, for example, still negative out to 5 year maturities. The U.S 10 year Treasury yield has climbed from a record low of 0.5% earlier in August, to 0.7%, after a stronger than expected rise in U.S July inflation. A further sign of the U.S economic recovery came in yesterday’s weekly new unemployment claims, which were below one million for the first time in seven months.

• The hunt for yield continues to surprise

In the current world of cheap money we are continually faced with ‘that can’t be true!’ stories, that are indeed true. The latest is from the U.S high yield market, an asset class formerly known as ‘junk bonds’. Ball Corporation -an aluminium can manufacturer- has borrowed $1.3bn from investors for 10 years, at a rate of 2.875%. By way of comparison, the U.S 10 year Treasury -regarded by many as the safest possible financial asset- yielded the same amount as recently as late 2018. The ‘hunt for yield’ is taking investors into higher risk assets that many would not have held before.

• Gold

is down 5% since peaking at a new high of $2,069 on 6^th August. As U.S inflation increases, the negative real interest rate on dollar cash increases, making gold more attractive.

• U.S economic data

This week’s reported rise in U.S inflation, with core CPI up 1.6% in July over the previous 12 months (compared to 1.2% in June), has added to the perception that the U.S economy is enjoying a broad-based recovery, despite large pockets of renewed lockdowns. It is supported by several weeks of generally good employment data. This makes it easier for Republicans in Congress to bat away the Democrats demand for a $3 trillion fiscal stimulus, that would include extending furlough pay to January, and to offer a compromise at $1 trillion. There may be an element of genuine fiscal conservatism that motivates Republicans (though recent Democrat presidents have shown more of that than Presidents Bush and Trump). But with only a few months to go before the Presidential and Congressional elections, the size and the nature of any new stimulus will more likely be made on purely political calculations.

• U.S / China tech war

It is unclear to what extent President Trump’s recent verbal onslaught against Chinese tech companies is a pre-election gambit that investors can afford to sit through, or a fundamental change in long-term U.S policy that will ultimately lead to two rival tech spaces in the world.

Pragmatism would suggest the former: U.S tech companies sell a lot to China, with China accounting for 25% to 35% of sales made by Nvidia, Texas Instruments, Qualcomm, Intel and Broadcom. Apple assembles its products in China, and the country (including Taiwan) accounts for 20% of its world-wide sales. If Trump orders Google’s Android and Apple to stop allowing the highly popular Tenant’s We Chat app to be downloaded on their mobile devices, sales by those companies in China could plunge. Furthermore, some analysts argue that cutting Chinese tech companies from U.S suppliers will be counter-productive. It will hasten the emergence of top-class chip manufacturers in China, financed with cheap government credit, that go on to compete globally against U.S companies.

But national security considerations, and a sense of foul play regarding trading rules, may yet win out. The U.S feels that China has had a free hand for too long in the U.S market, able to buy U.S tech companies and use their growing share of consumer electronics and associated software to hollow out U.S technological superiority and for espionage purposes. And for all China’s talk of upholding trade and globalisation, it is accused by the west of flouting WHO rules by having an unlevel playing field in its home market, in tech and other sectors.