Daily Comment (August 7, 2023)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with several items related to China and its relations with the rest of the world.  We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including news of continuing moderate declines in U.K. home prices and more evidence that U.S. scientists on making progress on using fusion as a future energy source.

China-Australia:  The Chinese Ministry of Commerce said it will finally remove the 80.5% tariff on Australian barley that was imposed in May 2020 to retaliate against then-Prime Minister Morrison’s call to investigate Beijing’s role in the global coronavirus pandemic.

  • Faced with slowing economic growth, worsening relations with the West, and a realization that the tariffs hadn’t had much impact on Australia, the Chinese government in recent months has been signaling that it will ease off its punitive measures.
  • Once the barley tariffs are lifted, Canberra is hoping Beijing will also lift its punitive tariffs on Australian wine.

China-Ukraine-Russia:  The multilateral peace forum on the war in Ukraine held in Saudi Arabia over the weekend failed to produce any concrete results, but diplomats are praising China’s “constructive” participation and its commitment to also attend the next meeting.  China’s participation in the forum, which focused on Kyiv’s 10-point plan to end the war, is being taken as a sign that it is putting a bit of distance between itself and Russia, despite President Xi and President Putin declaring a “no limits” partnership in the past.

China-Philippines:  Despite China’s improved behavior in some aspects of its international relations, the Chinese continue to harass some members of the U.S.-led geopolitical bloc.  On Saturday, a Chinese coast guard vessel blocked and water-cannoned a ship trying to resupply Philippine troops on a contested shoal in the South China Sea.  The shoal is well within the Philippines’ exclusive economic zone, but China claims it as its own territory.

  • China’s aggressive action was apparently planned well in advance. The move likely aimed to punish the Philippines for its recent assertiveness in defending its exclusive economic zone, strengthening its U.S. alliance and other security partnerships, and publicizing China’s gray-zone aggression in the South China Sea.
  • The Chinese action is particularly concerning because any armed attack on Philippine public vessels, aircraft, or armed forces in the South China Sea would invoke U.S. mutual defense commitments under the U.S.-Philippine security treaty.

China-United States:  Late last week, U.S. authorities arrested two ethnic-Chinese sailors in the U.S. Navy for selling military secrets to a Chinese intelligence officer in California.  The arrests illustrate how China’s Ministry of State Security focuses on recruiting Chinese Americans and ethnic Chinese people living in the U.S. to gain access to sensitive military secrets, technology, and other information.

United Kingdom:  Data from housing firm Halifax showed U.K. home prices declined in July to an average of £285,044, for a fourth straight monthly decline.  Nevertheless, even as the air comes out of the British housing market in response to slow economic growth and a long string of interest-rate hikes by the Bank of England, the home-price declines remain relatively modest.  The average home price reported by Halifax was down just 0.3% from June, and it was down just 2.4% from the same month one year earlier.

Niger:  The junta that seized control of the government last week closed the country’s airspace, forcing several international airline flights to be re-routed.  The airspace closure was apparently to help thwart a threatened military intervention by the Economic Community of West African States (ECOWAS).  The ECOWAS militaries had threatened to intervene if the coup plotters didn’t step down by Sunday, but the deadline has passed with no action so far.

U.S. Private Property Rights:  A nonprofit led by Edward Blum, the activist who pushed for this summer’s Supreme Court decision outlawing affirmative action in college admissions, has sued to block the Black-owned venture capital organization known as the Fearless Fund from running its program offering grants to small businesses owned by Black women.  Alleging the program practices unlawful racial discrimination, the suit suggests that today’s culture wars could potentially trip up private investment funds or investors who want to seed projects by historically undercapitalized groups.

U.S. Bond Market:  Even as the yield on shorter-term fixed income remains relatively stable, the yield on benchmark 10-year Treasury obligations settled at 4.060% on Friday, within striking distance of the 14-year high of 4.321% reached last October.  The “bear steepening” is widely considered a reflection of growing optimism about the economy.  We still think a mild recession is likely soon, but more investors and analysts seem to be looking for a “soft landing” that would encourage the monetary policymakers to keep interest rates high for an extended period.

U.S. Real Estate Market:  New research from the University of Toronto shows that diverse city downtowns with a mix of offices, residences, and attractions have nearly returned to, or even exceeded, their pre-pandemic foot traffic rates.  In contrast, downtowns that feature mainly office buildings remain far below their pre-pandemic foot-traffic levels.  That realization is sparking downtown redevelopment projects in a number of cities, many of which involve municipal governments providing incentives for office-to-residential conversions.

U.S. Fusion Energy:  Scientists at the Lawrence Livermore National Laboratory in California said they have successfully repeated an experiment in which they sparked a fusion reaction that produced more energy than it used.  The successful replication has led to increased optimism that scientists are now on track to eventually be able to produce copious amounts of clean energy, which could dramatically reshape the economy and produce new investment opportunities in the coming decades.

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