Geopolitical Developments: Markets Are Feeling The Chill Of The New Cold War

What China is doing to global financial institutions and to its own crown jewels is bedeviling investors, who had hoped that Biden would retract on Trump’s anti-China policies only to find he is expanding them. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), but my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought one positive factor for US stocks. Copper's chart is signifying global growth. But there were also several negative factors across global asset classes. Oil is pointing to stagflationary conditions. The US yield curve is rising and in the current context that is bearish. Inflation expectations are rising based on measures of Treasuries and TIPS. Taken together, the market looks set to discount further bad news and fall moderately over the next few days.

The Cold War antagonism gripping America and China is mirrored in the CCP’s own attitudes to its crown jewels in the private sector, as now the CCP is investigating 25 financial institutions for political improprieties related to their lending and government relations. This seems rich given that the IMF investigation reveals that China clearly influenced the IMF into giving it a favorable rating. The Chinese can shoot back that this has been going on for ages, and that recently Saudi Arabia and Brazil did the same thing, so America is simply picking on China to hold it back. But the score adds up negative for China: consider the treatment of minorities in its two western provinces (Tibet and Xinjiang), its impolitic vaccine diplomacy and refusal to acknowledge Chinese market practices are what created COVID, and its bullying of China Sea neighbors, America has a clear point about the CCP’s malevolence and its starting to impact how investors view China. FT reports that “A growing number of asset allocators plan to reduce their exposure to China as regulatory turmoil has hit foreign investors in the country, according to a new survey by Invesco…A poll by the $1.61tn fund manager of more than 200 professional investors including pension funds and insurers, conducted in June and July, found that 12 per cent expected to decrease China’s place in their portfolios — three times as many as in 2019 when it last conducted the survey.”

This twin burst of anti-market politics from China and the US is helping lead this consolidation off the summer highs. I expect the rhetoric to continue and that is adding to risks that this consolidation becomes a bear market.

My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), Apple (AAPL), Gibraltar Industries (ROCK), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a hedged position in the S&P 500 (UPRO and SPXU).