Upturn In China-US Relations Buoys Markets

Markets were buoyed by the clear and hopefully decisive improvement in China-US relations yesterday.

Two working groups now planned to improve economic relations between the two countries. The first meeting is planned to take place as soon as today. One group will focus on commercial interests and be driven by private business. The second will deal with respective export policies.

This sounds more like the kind of pragmatic and decisive breakthrough that is required. The proof will be in the pudding and only time will tell, but markets are correct to respond favourably to these developments.

The global economy most certainly needs some relief from the return to protectionist policies that have been occurring.

However, there was further worrying news out of Europe. New lending growth barely moved the needle at just 1.3%. This is akin to levels seen in the Sovereign Debt Crisis. Which was a crisis of tectonic plate shifting proportions. 

Lending has been nose diving constantly for the past year and there is no sign of a turnaround in this pattern. This is what happens when consumers and businesses alike are depressed and even scared. It cannot be emphasised enough that a major war on your doorstep is unsettling for everyone and has serious economic impacts.

Meanwhile, in the USA the Manufacturing Recession continues. The Federal Reserve Bank of Dallas’ general business activity index for Manufacturing in Texas remained deep in covid-lockdown levels at -17.2.

The facts are clear, indeed overwhelming that US manufacturing is on its knees and with no bounce to speak of.

It had been expected that US stocks would rally Monday and potentially in to Tuesday. The rally looks better, more sustainable than the previous small bounces on the way down over recent weeks. It does need to kick on a bit higher from current levels to really turn the tide.

Australian Retail Sales were up an impressive 0.5% in July.

Impressive, if you forget they were down a whopping 0.8% last month.

Unable to recover the previous month’s collapse, at least some stabilisation of the bleak retail sector was achieved.

Over the past six months, Retail Sales have had an average growth of just 0.1%. Department store sales remain well down. Restaurants and cafes showed small growth in the past month, but this looks to be less than the price hikes seen. It is likely restaurants and cafes are compensating for a drop in the volume of customers with ratcheted higher prices.

The numbers are not as positive as the headline suggests. Still down 0.3% over the past two months. The sector remains in crisis management. Equity markets probably over-reacted to the upside.

Overall, given the China-USA developments, it was a good news day. We should remain well aware, however, that the current run of economic data among the major economies remains concerning to say the least.

Market commentary and analysis from Clifford Bennett, chief economist at ACY Securities

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