Tectonic shifts in the world economy: China buys Europe

U.S. White House Advisor Peter Navarro said on Monday of the trade deal with China that “it’s over”, scaring the markets. These comments collapsed futures on the S&P500 by more than 1% in 20 minutes. Later on, Navarro himself said that the words were taken out of context, the deal is valid, which President Trump immediately rushed to confirm.

The world markets have fully recovered from this drop and continue the growth which started on Monday. It is worth paying attention to how quickly investors switched to selling, and the very idea of breaking the deal did not cause bewilderment. It is an important signal that investors are ready for this scenario. They will continue to experience such moments, as global tectonic shifts and unforeseen events affect short-term business cycles.

By tectonic shifts, we mean the strengthening of China’s global role and the weakening of the U.S. position. The GDP share of developing countries exceeded 50%, and their contribution to global economic growth in previous years has regularly been many times higher than that of Europe and the U.S.A. This can be considered a natural process, as overpopulated China and India have much more room for rapid expansion. Lagging far behind in dollar GDP per capita, they are rapidly closing the gap in total Gross Domestic Product at purchasing power parity, which is highlighting Asia’s growing role.

It should come as no surprise that Indian and Chinese capitals are buying up shares of European corporations because of technologies, brands, and copyrights. Recently there have been attempts by the U.K. and E.U. to protect their businesses from hostile takeovers.

However, one should be prepared for the fact that very soon the same countries will be happy to make such deals. The debt loaded economies of Europe – e.g. Italy, France, and Spain – are clearly struggling to raise capital on the market. Fresh money from Asia could be salvation. China has impressive reserves, including low labour costs and high business mobility. However, they are facing a lack of production technology and software. And now we are witnessing that Italy is willing to cooperate with China on the “One Belt and One Road” initiative, which was previously used by China to invest in the infrastructure of poor neighbouring countries. Italy is a rich country, but it has been hit hard by the pandemic, and its national debt is predicted to exceed 168% next year. France’s resilience can also be explained by its debt burden, which promises to exceed 145% by the end of the year. France, by the way, also signals its readiness to negotiate, which can also be easily explained by the debt burden exceeding 145% of GDP.

Local problems are on everyone’s lips: the U.S. elections and the coronavirus pandemic. It is worth remembering that markets experienced stressful volatility levels in 2000 (2001), 2008, and 2016 when there was no complete certainty who would be the next U.S. president. We are witnessing the same situation now, which promises to fill presidential campaigns of candidates with populist slogans by putting markets on the hook of volatility.

The coronavirus pandemic is also making life difficult for investors. The consequences of the spring wave on companies’ revenues and the extent of long-term cuts in the labour market are still unclear, but the possibility of a new wave is already looming. The U.S. states, one after the other, have announced an increase in the number of infected people, sometimes with record numbers. At the same time, politicians say they won’t close the economy as quickly as they did in spring. This may be a fatal mistake for people’s lives, but the financial situation does not allow them to do otherwise.

The FxPro Analyst Team