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10 May 2021

US Restrictions Impact Chinese Markets

The UK’s leading 100 stock index outperformed all major indices last week, recovering 2.27% from Tuesday’s lows to finish the week up 1.56%. Strong performance towards the end of the week may have been aided by the Bank of England’s (BoE) latest policy meeting, as rates remained unchanged at 0.1% while the BoE raised its growth forecasts to 7.25% this year, the highest in more than seven decades. Although this is up from the 5% projection made back in February, Andrew Bailey, the central bank’s Governor, ensured the move was not taken out of context as the growth forecast purely stems from the economy shrinking in the last year. He said: “[The strong recovery] takes us back by the end of this year to the level of output we had at the end of 2019... two years of output growth have been lost.” The BoE also announced a reduction in the pace of quantitative easing yet stressed this does not signal a change in stance of its monetary policy.

Chinese equities took another hit last week after geopolitical relationships withered on two fronts. First, China indefinitely suspended all activity with Australia under a China-Australia Strategic Economic Dialogue, as some Australian Commonwealth Government officials were accused by China's National Development and Reform Commission (NDRC) on Thursday of “launching a series of measures to disrupt the normal exchanges and cooperation between China and Australia out of Cold War mindset and ideological discrimination.” The relationship between the two Asia-Pacific countries has gradually deteriorated since Australia became the first country to ban Chinese tech company Huawei from its 5G network. Essentially, the suspension of the agreement will ban exports of Australian coal with copper concentrate imports to China also dropping off. Australia’s commodity sector is therefore expected to take a hit, but its largest export in iron ore is likely to remain protected from the current political tensions. As a result, the Australian Dollar initially dropped but has recovered somewhat. Chinese equities were not so fortunate, however. The CSI 300 index was down 2% on Friday morning, no doubt also impacted by a report revealing US President Joe Biden’s administration is set to maintain its pressure on China by preserving former President Donald Trump’s limitations on US investments in Chinese companies.

US markets had a mixed week. The Dow Jones Industrial index hit a record high while the Nasdaq and S&P 500 both fell at the start of the week to slightly recover going into the weekend. As of Friday morning, the Dow Jones was up 2.07%, the Nasdaq was down 2.01%, and the S&P 500 dropped by 0.08%. An inspiring weekly jobless claim figure helped to provide some insight on the US recovery, but questions have begun to surface as to whether there are enough workers to fuel economic growth. Some companies in the US, such as Chipotle and MGM resorts, have stated they are struggling to employ or attract workers for their businesses. Stimulus cheques and generous unemployment benefits could be a contributing factor to what is unfolding to be a “Job Paradox” in the US, especially for companies in the leisure and hospitality sectors, according to one Senior Economist at Bank of America Corp.

In the UK, one of Rotherham’s largest employers, Liberty Steel, may be set to secure a £200m lifeline after its previous lender Greensill Capital went bust in early March this year. Almost all work at the Rotherham site has ground to a halt with 3,000 workers across 11 different sites at risk of losing their jobs. It is clear Sanjeev Gupta, the CEO of steel and mining conglomerate Gupta Family Group (GFG), is trying hard to keep the company alive. He recently contacted the UK Government for £170m in support but was rejected. Business Secretary Kwasi Kwarteng told the BBC he wanted to give the firm "time to find finance".

Thankfully, that appears to be a possibility as California-based investment firm White Oak Global Advisors are in the preliminary stage of an agreement, but this first needs the approval of GFG’s creditors including Credit Suisse and Tata Steel. If the loan does go ahead, a degree of job security will return to Liberty Steel employees. However, Sanjeev Gupta has also appointed four new directors to lead a committee that will be given the freedom to sell underperforming parts of the company. This could potentially lead to some UK plants being sold off to pay back the debt, creating further fear within the already declining UK steel industry.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
US Restrictions Impact Chinese Markets
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