New article from Tatton Investment Management: Just as the sun comes out, clouds appear in the East

26 May 2020

Big trouble in big China

Over the past week, it felt as if the new normal of enforced idleness paired with less stringent lockdown rules and summer weather would lead to a happier mood across Western Europe, including the UK. The same applied for investors, whose portfolios also enjoyed some time in the sunshine. However, the outlook began to cloud over somewhat again towards the end of the week.

Stock markets jolted upwards at the start of the week on news that a viable coronavirus vaccine may become available before the start of the next cold season. A surprise announcement by Germany and France that they supported the issuance of quasi-joint European bonds – to the tune of half a trillion €-Euros – with the aim of pump-priming the European Union’s post-COVID-19 recovery added to the positive air within markets. Some thought such Eurobonds could become a very powerful counterweight to US Treasury bonds, and help overcome one of the core fiscal and monetary weaknesses of the Eurozone.

Economic news flow later in the week cheered up economists, who have recently been expecting the worst. As a result, data that is only ‘really quite poor’ rather than outright ‘devastating’ is being greeted more warmly than we ever thought recession-indicating numbers possibly could. That, combined with oil prices stabilising at levels above $30 per barrel (see separate article) does tell the story of a tide turning, after so many weeks of economic doom and gloom.

The positive stock market movements of the past weeks have all but anticipated this turning already and it takes considerable, optimistic imagination to see stock markets rising higher without considerable risk of ‘altitude sickness’ hounding capital markets once more. It is undeniably positive that the loosening of lockdown restrictions across Europe has led to an already notable rise in levels of economic activity, but without – thus far – a rebound in the rate of infections. Quite the contrary, many formerly strongly affected areas are not registering any new cases.

Given the rate of infections is still growing in countries blessed with permanently warmer climes, like India and Brazil, we cannot be sure whether COVID-19 is following the seasonal pattern of influenza, but for the moment it would appear that the coronavirus’ decline, together with the prospect of a vaccine before the winter, is providing a better near-term outlook than we could recently have dreamed of.

That’s where the ‘onward and upwards’ narrative ends and pressing concerns have to be discussed. First comes the prospect of negative interest rates and bond yields in the UK. This may be a new and alien concept to UK investors, but it has been the norm across the Eurozone, Switzerland, Sweden and Japan for considerable time (and they have coped with this relatively well in recent years). To put this prospect into perspective, for institutional investors the ‘real’ interest rate is far more relevant than the ‘nominal’ rate (i.e. the yield after the impact of inflation).

As the chart below shows, holders of UK inflation-linked government bonds have endured ‘negative yields’ since 2015, lower than other major nations’ inflation-linked bonds. Another way to think about this is that investors expected UK inflation to be higher than elsewhere – so nothing really new there.


On the positive, the lower the rate at which the government can borrow to pay for all the coronavirus expenses right now, the less of an interest burden this constitutes for the future. And, given all western nations are increasing their borrowing at a similar rate versus their GDP, there is much less pressure to reduce the national debt levels in the near future in order not to be shunned by the bond markets for ‘profligate spending habits’. This is why economists are currently far less concerned about austerity coming back to bite us in quite the same way as after the global financial crisis more than ten years ago.

The other concern is once again that of  international politics. Following Donald Trump’s tirades against China of the past weeks, this week was China’s turn to strike back. Their once-a-year parliamentary session rubberstamped a proposal to align Hong Kong’s legal status much more closely with mainland China, which will give the Chinese authorities far-reaching powers to crack down on the freedom-defending people of Hong Kong. Sadly, this also entirely devalues their parallel announcement of intending to honour the US-China trade truce of January (Phase 1 trade deal), because the US would never be able to do the same if China effectively annexed Hong Kong.

Against this new and unexpected development, we will be assessing whether this move is as much a domestic manoeuvre driven by domestic political needs as Trump’s election campaign anti-China rants are. We are not overly optimistic at this point and may have to revise our previous optimism towards China – that has benefitted portfolios nicely so far over the course of this year.  

News Archive

26 May 2020

New article from Tatton Investment Management: Just as the sun comes out, clouds appear in the East

22 May 2020

New video from Tatton Investment Management

18 May 2020

New article from Tatton Investment Management: Us-China cold war: Threat or blessing?

11 May 2020

New article from Tatton Investment Management: Most welcome, if feeble, signs of pulling together

4 May 2020

New article from Tatton Investment Management: Opening-up will be slower than locking down

27 April 2020

New article from Tatton Investment Management: V or U-shaped recovery scenarios - the jury is out

20 April 2020

New article from Tatton Investment Management: Lifting lockdown remains a delicate balancing act

20 April 2020

New video from Tatton Investment Management: Stock markets between hope and despair

15 April 2020

New video from Tatton Investment Management: Is now the time to invest?

13 April 2020

New article from Tatton Investment Management: Fading threat of financial crisis re-opens old divide

6 April 2020

New article from Tatton Investment Management: Unprecedented quarter or calm before the storm?

30 March 2020

New article from Tatton Investment Management: Extraordinary: bear and bull market all in one

24 March 2020

New video from Tatton Investment Management: Why have stock markets appeared to rally on the lock-do

23 March 2020

New article from Tatton Investment Management: Government ordered recession

19 March 2020

New video from Tatton Investment Management: Confusion reigns in Capital Markets

18 March 2020

New article from Tatton Investment Management: Why aren't you doing something?

17 March 2020

New video from Tatton Investment Management: From euphoric recovery to depressed tumble

16 March 2020

New article from Tatton Investment Management: Notes on a crash: the short, the medium and long term

13 March 2020

New video from Tatton Investment Management: Panic equity selling or panic raising of precautionar

12 March 2020

New article from Tatton Investment Management: Forced sellers and other distractions

9 March 2020

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6 March 2020

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2 March 2020

New article from Tatton Investment Management: Coronavirus - hitting too close to home

28 February 2020

New article from Tatton Investment Management: This week's market correction requires perspective

26 February 2020

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24 February 2020

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17 February 2020

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10 February 2020

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3 February 2020

New article from Tatton Investment Management: Looking through the noise of the week

27 January 2020

New article from Tatton Investment Management: Short break to Goldilocks?

20 January 2020

New article from Tatton Investment Management: Parallels and differences to January 2018

14 January 2020

Appointment of Joint Broker

13 January 2020

New article from Tatton Investment Management: So far so good

8 January 2020

Tatton: Woodford & M&G suspensions have driven IFAs to us

6 January 2020

New article from Tatton Investment Management: 2020 starts with a Trump card

23 December 2019

New article from Tatton Investment Management: Goodbye 2019 - welcome 2020 and a new decade!

16 December 2019

New article from Tatton Investment Management: Brightening horizons - 2020 Outlook

8 December 2019

New article from Tatton Investment Management: Can Trump derail the 2020 economic upturn?

2 December 2019

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25 November 2019

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18 November 2019

New article from Tatton Investment Management: Swilling cash eases the market mood music

11 November 2019

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11 November 2019

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4 November 2019

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28 October 2019

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21 October 2019

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17 October 2019

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17 October 2019

Acquisition of Sinfonia Asset Management Limited (SAM)

14 October 2019

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7 October 2019

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30 September 2019

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23 September 2019

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16 September 2019

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9 September 2019

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2 September 2019

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27 August 2019

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19 August 2019

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11 August 2019

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5 August 2019

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29 July 2019

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22 July 2019

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15 July 2019

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8 July 2019

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1 July 2019

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24 June 2019

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17 June 2019

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10 June 2019

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3 June 2019

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3 June 2019

Appointment by Frenkel Topping

3 June 2019

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3 June 2019

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27 May 2019

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20 May 2019

New article from Tatton Investment Management: Market support for Trump or unwarranted equanimity?

13 May 2019

New article from Tatton Investment Management: Geopolitics re-enter market stage

7 May 2019

New article from Tatton Investment Management: Central banks disappoint expectations

29 April 2019

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23 April 2019

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16 April 2019

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15 April 2019

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8 April 2019

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1 April 2019

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25 March 2019

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18 March 2019

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11 March 2019

New article from Tatton Investment Management: ECB stimulus U-turn leaves markets unimpressed

4 March 2019

New article from Tatton Investment Management: £-Sterling ‘applauds’ prospect of Brexit delay

25 February 2019

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18 February 2019

New article from Tatton Investment Management: Investment perspectives for different Brexit outcomes

15 November 2018

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15 October 2018

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1 October 2018

New article from Tatton Investment Management: Poor politics containing bond market risks?

27 September 2018

New article from Tatton Investment Management: Brexit clamour vs. real market new

7 September 2018

New article from Tatton Investment Management: Interesting times ahead

31 August 2018

New article from Tatton Investment Management: “Not the end of the world”

24 August 2018

New article from Tatton Investment Management: Steady markets vs. noisy politics

17 August 2018

New article from Tatton Investment Management: Political strongman tactics come home to roost

10 August 2018

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3 August 2018

New article from Tatton Investment Management: A gentle deceleration?

27 July 2018

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20 July 2018

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13 July 2018

New article from Tatton Investment Management: Hard Brexit demonstration potential?

6 July 2018

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6 July 2018

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29 June 2018

New article from Tatton Investment Management: Digesting or consolidating?

27 June 2018

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22 June 2018

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15 June 2018

New article from Tatton Investment Management: No surprises

8 June 2018

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1 June 2018

New article from Tatton Investment Management: Ignore politics at your peril

25 May 2018

New article from Tatton Investment Management: GDPR? No - far more interesting news!

18 May 2018

New article from Tatton Investment Management: What's the economic reality of this week's news?

11 May 2018

New article from Tatton Investment Management: Batten-down-the-hatches?

4 May 2018

New article from Tatton Investment Management: Past the peak?

27 April 2018

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20 April 2018

New article from Tatton Investment Management: A mixture of messages

6 April 2018

New article from Tatton Investment Management: Could do better

6 April 2018

New article from Tatton Investment Management: Peaking, plateauing or dimming – and how about that

29 March 2018

New article from Tatton Investment Management: End of a stormy quarter

23 March 2018

New article from Tatton Investment Management: Now we know it's risky!

16 March 2018

New article from Tatton Investment Management: Back to Normal?

9 March 2018

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2 March 2018

New article from Tatton Investment Management: Time to take some profits

23 February 2018

New article from Tatton Investment Management: Change of direction or gradual normalisation?

16 February 2018

New article from Tatton Investment Management: Breathing easier for the moment

9 February 2018

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6 February 2018

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2 February 2018

New article from Tatton Investment Management: Good news turns bad news - again!

26 January 2018

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19 January 2018

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12 January 2018

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5 January 2018

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15 December 2017

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8 December 2017

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5 December 2017

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1 December 2017

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24 November 2017

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17 November 2017

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10 November 2017

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3 November 2017

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27 October 2017

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13 October 2017

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6 October 2017

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29 September 2017

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22 September 2017

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15 September 2017

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8 September 2017

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1 September 2017

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25 August 2017

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11 August 2017

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4 August 2017

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28 July 2017

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21 July 2017

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23 June 2017

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