Can Sleepy Joe spark fireworks?

Will the Democrats stick with Sleepy Joe?

While the 5th November is remembered in the UK for Guy Fawkes and the Gunpowder Plot of 1605, it is the forthcoming US presidential election on that date that could create fireworks.

Following that disastrous first televised debate, will the Democrats stick with Sleepy Joe? Biden says he ‘screwed up’ the debate, but has vowed to stay in the election. With more senior Democrats calling for Biden to step down, the fortunes of many countries could rest upon the outcome of the election and whether Biden or Trump ends up in the White House in 2025.

The Democrats will need to decide who to nominate at the Democratic National Convention (DNC) in Chicago, from 19th – 22nd August. While still unlikely, the odds are shortening on Kamala Harris and even Michelle Obama.

What is at risk?

Ukraine, Taiwan, Israel, and Gaza could all be affected, while NATO could also be at risk. Putin has said he prefers Joe Biden because of his ‘predictability,’ but would no doubt prefer a NATO and Ukraine war sceptic Trump. China’s Xi Jinping will be concerned that both candidates will be tough on trade, with the risk of more tariffs on Chinese goods. However, when it comes to Taiwan, the stance is different. Biden has re-iterated a pledge to come to the defence of Taiwan and is building an ‘Asian NATO’ through ties with Australia, South Korea, and Japan. However, Trump has previously accused Taiwan of undermining American businesses and has expressed opposition to US aid for Taiwan. He also threatened to remove US troops from South Korea unless Seoul paid Washington more money.

For Ukraine and NATO, Trump is the biggest risk, as he has threatened to reduce support unless European countries boost defence spending, although these are now starting to do so belatedly. This would apply to the UK, and Labour is looking to step up defence spending, but only when able to afford to do so. Is this realistic given the NHS/social care spending requirements?

Perhaps the biggest risk, given the recent Supreme Court ruling, putting a president potentially above the law, is a very close election result that is not accepted by Trump or his supporters. A crisis of American democracy could damage US global leadership and encourage the likes of Iran or North Korea. Given these risks and the age of both Biden and Trump, Putin and Xi Jinping must be feeling smug.

Will the election result affect the US stock market?

Given the dominance of the ‘Magnificent Seven’ and especially the ‘Three-trillion-dollar AI club’ probably not, as the Federal Reserve’s interest rate policy is likely to be the key driver. However, global equity markets would not be comfortable with an extension of the US/China trade war and any further escalation of tension in Taiwan, or fighting in the Middle East and Eastern Europe.

Front runner Trump has also promised tax cuts, and how would this go down with bond markets given the scale of the US deficit?

What have we been watching?

Independence Day holiday in the US made for a quieter trading week, while Labour’s election victory played second fiddle to the second-round voting in the French election. The UK election result came as no surprise, although in France, second round voting all went wrong for Le Pen’s National Rally, with the country now facing political deadlock. The prospect of a minority government or fragile coalition isn’t likely to appeal to markets, but the French constitution prohibits a fresh round of elections for a year.

While Sir Kier Starmer and the wider party are celebrating Labour’s election win, the UK gilt yield curve is steepening, suggesting the market is already questioning the funding of Labour’s financial plans. Globally, bond yields are creeping up – a sign of market concerns about the levels of government debt and spending pressures? Meanwhile, global manufacturing data for June was mixed, with some signs of life in Asia but remaining poor across Europe. Higher-for-longer interest rates are clearly a headwind. Despite this, US equities climbed to a fresh high helped again by one of the three trillion-dollar club – this time, Apple.

The EU has raised tariffs on Chinese EV’s from 17.4% to 37.6%, as it signalled a few weeks ago. China has already initiated a review of EU pork imports in a retaliatory measure.

Tensions between China and Taiwan remain elevated. In the latest development, China confiscated a Taiwanese fishing vessel off the coast of the politically sensitive Kinmen Islands.

 

Eurozone inflation edged lower in June to 2.5%, as did core inflation to 2.8%, in line with expectations. However, services inflation remains sticky at 4.1%. The European Central Bank (ECB) has said it will follow a ‘data-dependent and meeting-by-meeting approach’ to further interest rate cuts. So, will it be more cautious given sticky services inflation? France faces political deadlock after a left alliance beat the far right but with no majority. Emmanuel Macron’s centrists staged an unexpected comeback to push Marine Le Pen’s National Rally into third.

 

In the US, it continued to be ‘bad news is good news.’ Worse-than-expected ISM data showed the service sector contracted at the fastest pace in four years in June, with a reading of 48.5. This raised hopes for an interest rate cut, even though the latest Federal Reserve minutes once again confirmed that it will need more evidence of slowing inflation, before a rate cut.

Read our latest Chinese investment insights from Alpha PM

 

China’s manufacturing sector remained in contraction in June with a PMI reading of 49.5. Meanwhile, service sector growth was weaker than expected and softened to the slowest pace in eight months.

Read our latest investment insights from Alpha PM

 

Brent oil edged higher to $87 on potential production disruption from Hurricane Beryl. Meanwhile, an Iranian official said Iran would use ‘all means’ to back Hezbollah, if Israel launches a full-scale war in Lebanon.

Finally, there is only so much you can recycle. NASA has selected Elon Musk’s SpaceX to bring down the International Space Station at the end of its life. SpaceX will build a vehicle to push the 430-tonne orbiting platform ‘safely’ into the Pacific Ocean early in the next decade. The US, Europe, Canada, and Japan have agreed to fund the station until 2028 while Russia has said it will extend its involvement until at least 2028.

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