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Commentary on financial market developments – August 2020


  • China: monetary stimulus worth USD 100 billion
  • further deterioration in US-China relations


In August, as in July, most equity indices continued to rise. In particular, technology stocks performed well, while sectors heavily affected by the coronavir crisis such as aerospace, transport and tourism did not. The main global indices have already surpassed their pre-crisis highs of spring this year, which can only be interpreted as investors having extreme faith in governments and central banks to do their utmost (borrow heavily and provide liquidity!) to help companies and households keep spending and consumption close to pre-crisis levels.

An example is the monetary stimulus that the Chinese central bank undertook in August. The latter decided to provide banks with additional liquidity worth USD 100 billion in order to support the recovery on the consumption side.

The US Fed has also followed a similar course, albeit with a different implementation. It has reached a so-called strategic review, which allows for the continued pursuit of easy monetary policy. In practice, this means that US inflation will be able to exceed 2% without the Fed having to react immediately by raising interest rates. Moreover, the Fed’s forecast suggests that rates will remain at zero until at least the end of 2022!

However, the aforementioned US and China continue to be in a major trade conflict, which is exacerbated by the impact of the upcoming presidential elections in the United States of America. US President Donald Trump has issued an order to ban trade with Chinese companies that own the WeChat and TikTok apps. In addition, this was followed by the strengthening of restrictions on Huawei Technologies , which are intended to limit the company’s access to certain commercially sold chips. As a result, companies selling chips to Huawei that have been manufactured using US equipment or software will now have to apply for permission from the US administration.

In addition, with the onset of autumn, we can expect more coronavirus problems in the northern hemisphere again due to the coincidence with flu-like illnesses. It is therefore surprising that current share prices are virtually completely unreflective of the risks facing companies and economies.

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