Market Watch 15.03.2021

1. Big Government, Big Stimulus. The American Rescue Plan, President Joe Biden’s $1.9tn stimulus package, was signed into law on Thursday, as a means of rapidly kick-starting the US economy into gear again. It has been cited as reminiscent of FDR’s New Deal that sought to lift the US out of the grips of the Great Depression of the 1930s. What is noteworthy however, is how much of a contrast it is to the adoption of free market policies, from the likes of Ronald Reagan, in the 1980s. This decade saw the “Invisible Hand” deal with most economic problems. Low taxes, significant deregulation and extremely limited domestic spending epitomised the essence of Reaganomics. Yet, Biden’s stimulus package almost sailed through Congress. Many feel that this is a move towards a greater want, and perhaps a need, for greater government intervention in markets. We are more of the mind that this is purely contextual: Covid-19 has created an unprecedented situation that has required that government step in on behalf of its citizens. On the other hand, this could be blatant opportunism from President Biden; bond yields continued to rise this week, approaching the 1.62 mark. The scourge of inflation and rising interest rates could tame Biden’s propensity for flashy government spending. Regardless, the American public are content. According a Pew research poll, 70% of Americans support the bill. This is clearly indicative of the US population wanting greater government intervention. Or could that be marred by the shadow of Covid-19. Only time will tell.

2. Going for Gold (*Green*). Many governments’ pledge to go Net Zero by roughly 2030 has sparked a massive increase in demand for battery metals; mainly nickel, cobalt and probably the most popular, lithium. Huge investment banks such as Goldman Sachs and J.P. Morgan have predicted a “super cycle” of commodity prices on the back of global economies trying to implement green economies within their states. This would rival the rise in commodity prices that was seen in the early 2000s, mainly due to the enormous spending that has been seen in recent years and will continue to be seen. Expenditure on solar panels for utilities along with the introduction of electric battery charging stations could very easily spark a Green Industrial Revolution. Buyers beware, however. Battery metals may be the commodity of choice for “the greater good”, but what are its social costs? Well, demand in the battery metals market certainly exceeds supply. Who doesn’t want a Tesla? However, many companies are planning to mine in the deep sea for these metals, with some planning to increase production by 2024. The irony won’t be lost on many. There is a clear negative externality regarding the mining of battery metals in the oceans as it will no doubt disrupt the complex ecosystems that exist there. Looking forward, how green are electric cars? Not very, it would seem.

3. Lula da Silva is back. One of the “most popular politician on earth” as Barack Obama describe him is back on the political stage. Luiz Inácio Lula da Silva, the former president of Brazil, took the stage last week at the metalworkers’ union, saying that he will never give up on politics even if he is 75 years old. The return to the forefront of Brazilian politics was a surprise due to a judge's change to overturn Lula’ s convictions. He was barred from running for office and served 580 days in prison before being released in 2019. It is not sure yet if he will run for the next elections, but during his speech, he attacked the actual right-wing president Jair Bolsonaro regarding the pandemic and the economic situation in Brazil. During his term from 2003 to 2010, Lula contributed to bringing millions of people out of poverty with generous welfare policies, becoming one of Brazil's most important and popular leaders since the dictatorship in 1985. However, his term was also a controversial one due to his tactics of leading the country. He was the first democratically elected left-wing president and the one who refused to build coalitions with centrists in Congress and preferred instead to work with the politicians of traditional local elites. He has been convicted to 12 years in jail being accused of corruption, which implicated politicians and businessmen's scores in a huge kickback scheme. His corruption conviction was annulled last week because the provincial court that tried the cases acted outside its jurisdiction. Following his actions in the previous days, many politicians think that there is no doubt that he is back in the spotlight and prepare to run for the next presidential elections in 2022.

4. Hong Kong election law has been passed. There have been many controversial discussions regarding the Hong Kong election law between China and the US in the last couple of weeks. Despite the Biden administration's warnings, in previous weeks, the Chinese parliament passed the election law to reduce the proportion of democratically elected lawmakers in Hong Kong. The election law followed the national security legislation last year that paved the path for comprehensive repression on the pro-democracy movement in Hong Kong. Some US representatives have declared that they will continue to intervene and take action against the violations of democracy and human rights in Hong Kong. The law proved the intention of Beijing to a more protectionist approach to the territory by reducing the role of the local Hong Kong government. Carrie Lam, the city's leader, declared she was unable to answer some questions about the law as it was in the central government's hands. "I don't have the details," Lam said. The UK, Hong Kong’s colonial power until 1997, will review the law for possible breaches and make sure that Hong Kong’s rights and freedoms after the end of UK domination are still respected. The law is the “latest step by Beijing to hollow out the space for democratic debate in Hong Kong, contrary to the promises made by China itself”, UK foreign secretary Dominic Raab said.

5. Tough challenges before the German elections. 2021 is the election year for Germany, and the actual leading party, CDU, is facing some challenges, as the last polls suggested. Everybody is wondering who is going to succeed Chancellor Angel Merkel and her long-time leader’s party. Two German states chose new legislatures last week, and there is an increase in popularity for the environmentalist Green party, which could hold the key to forming Germany’s next government. The actual party is struggling with the speed of the vaccination process and the restrictions regarding the lockdown. It is an important moment for the new leader of Merkel’s Christian Democratic Union, Armin Laschet, to face his first big political test, as his opponent Winfried Kretschmann, the Germany’s only Green governor, is taking advantage in the race. Kretschmann has the power to ensure voters over a decade leading Baden-Wuerttemberg, an economic powerhouse in Germany. The CDU dominated Baden-Wuerttemberg in southwestern Germany for decades until Kretschmann won control a decade ago, making the Greens overtook the CDU to become the strongest party in the state. The alliance between CDU and CSU has benefited from Merkel’s efficient management of the pandemic over the last year, and it is still leading in many other lands, but the vaccination campaign has been criticised all over Germany because of its slower implementation. However, last Sunday, the CDU took major hit in the regional elections, and the Green party won the state of Baden-Wüttemberg again. Till the 26th of September, it is still a long way, and many situations and decisions can influence the outcome of the elections.

Thank you to James Ballentine for his collaboration and in-depth analysis!

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