Skip navigation Scroll to top
Scroll to top

LGT Navigator: Tensions between US and China continue to unsettle markets

May 18, 2020

The dispute between the US and China, which has been reopened by the corona crisis, as well as further bad news from the US economy are weighing on stock market sentiment. The US retail sector recorded a record drop in sales due to the pandemic-related lockdown. In addition, Fed Chairman Powell emphasized that a full recovery of the US economy may not be guaranteed until a Covid-19 vaccine is available.

Increasing tensions between the US and China

After US President Donald Trump accused China of being responsible for the coronavirus pandemic on several occasions, and brought back the dispute over the influence of the Chinese network supplier Huawei, relations between the two largest economies have fallen back to a low point. On Friday, the US Department of Commerce announced that chip manufacturers are not allowed to supply semiconductors to the Chinese smartphone manufacturer if they are based on software and technology from the United States.

According to US Federal Reserve Chairman Jerome Powell, it may require a vaccine against the corona virus before the US economy can fully recover. However, this could take until the end of 2021. Powell had previously warned of a prolonged economic crisis.

US unemployment rate could already be significantly higher

According to estimates by Neel Kashkari, President of the Federal Reserve (Fed) in Minneapolis, the unemployment rate in the US could be higher than 14.7%, as officially stated, and amount to around 25%. Kashkari assumes that because of the lockdown, many Americans have not registered as unemployed with the authorities and therefore do not appear in the official statistics. Even the Department of Labor admitted that the actual number of unemployed could be about 7.5 million higher. Because of this assumption, the senior central banker also sees a V-shaped economic recovery as unrealistic. Last week, Fed Chairman Jerome Powell also expressed little optimism and warned of a prolonged period of low growth and stagnating incomes.

Japan in recession

The world's third largest economy slipped into recession for the first time in four and a half years, due to the corona crisis. The gross domestic product shrank in Q1 compared to the previous year at an annualized rate of -3.4%. The main reasons were weak private consumption and lower investment. However, economists had expected an even stronger decline of -4.6%. In the final quarter of 2019, Japan's economy had already slumped by an annualized -7.3%.

Corona crisis already hit euro economy hard in the first quarter

As expected, the effects of the pandemic have resulted in a major setback for the European economy. The economic output of the euro states contracted by -3.8% in the first quarter (compared to the previous quarter) – this is the sharpest decline since data collection began in 1995. France recorded the sharpest slump (-5.8%), while the German economy fared somewhat better (-2.2%). However, the bottom has probably not yet been reached: Market strategists assume that the economic downturn will intensify in the second quarter. This is in-line with the assessment of the German government, which is forecasting the worst recession in post-war history for 2020.

US consumer climate deteriorating

Looking on the other side of the Atlantic, the outlook is gloomy too, as Americans have lost their spending desire. In April, they cut back on consumption once again and caused retail sales to slump by -16.4% compared with March. This is the biggest drop since the start of the survey. The restraint in consumption has partially been forced by the temporary closing of restaurants and retailers. But at the same time, millions of Americans have lost their jobs and thus face an uncertain future. The crucial question will therefore be whether and how quickly the propensity to spend will return once stores reopen. The US is heavily dependent on the population's willingness to spend, as private consumption accounts for around two thirds of economic output. At least the latest survey results from the University of Michigan in May have brightened things slightly up again. The consumer sentiment barometer climbed from 71.8 points in the previous month to 73.7 points. By contrast, analysts had anticipated a further dip to the 65 mark in view of the dramatic economic and labor market situation. The prospect of an imminent easing of pandemic measures and government aid packages may have led to a slightly more optimistic assessment of private households.

New York industry barometer recovers somewhat

In April, the New York Fed's economic indicator, the so-called Empire State Index, plunged to a record low of minus 78.2 points against the backdrop of the corona crisis. In May, the mood among industrial companies in the New York metropolitan area appears to have brightened again slightly, with the barometer climbing to minus 48.5 points. Nevertheless, the indicator continues to signal a sharp decline in economic activity. On a national level, however, industrial production in the US slumped in April by -11.2% month-on-month – the biggest monthly decline in the 100-year data series!



Economic Indicators May 18

MEZ Country Indicator Last
16:00 US NAHB Housing Market Index +30.0

Earnings Calendar May 18

Country Corporate Period
IT Telecom Italia Q1



LGT helps you make informed investment decisions

All about global economic and market trends at a glance

Subscribe to LGT's research newsletters

Follow us on TwitterFacebook or LinkedIn, where we inform you about latest market developments and LGT News. Further informationen is available on: LGT Social Media.

Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, +41 44 250 78 59, E-Mail:
Source: LGT Bank (Switzerland) Ltd.

Risk Disclosure (Disclaimer)
This publication is an advertising material / marketing communication. This publication is for your information only and is not intended as an offer, solicitation of an offer, or public advertisement to buy or sell any investment or other specific product. Its content has been prepared by our staff and is based on sources of information we consider to be reliable. However, we cannot provide any confirmation or guarantee as to its being correct, complete and up to date. The circumstances and principles to which the information contained in this publication relates may change at any time. Information that has been published should therefore not be understood as implying that no change has taken place since its publication or that it is still up to date. The information in this publication does not constitute an aid for decision-making in relation to financial, legal, tax-related or other consulting matters, nor should any investment decisions or other decisions be made on the basis of this information alone. It is recommended that advice be obtained from a qualified expert. Investors should be aware that the value of investments can fall as well as rise. Positive performance in the past is therefore no guarantee of positive performance in the future. Investments in foreign currencies are also subject to fluctuations in exchange rates. We disclaim all liability for any loss or damage of any kind, whether direct, indirect or consequential, which may be incurred through the use of this publication. This publication is not intended for persons subject to legislation that prohibits its distribution or makes its distribution contingent upon an approval. Any person coming into possession of this publication shall therefore be obliged to find out about any restrictions that may apply and to comply with them. In line with internal guidelines, persons responsible for compiling this report are free to buy hold and sell the securities referred to in this report.

US employment growth remains dynamic at the beginning of the year