Unprecedented stimulus flowing through will keep markets inflated: Craig Erlam

Expect Trump to up the anti-China rhetoric over the next three to four months, says Senior Market Analyst, OANDA.
We did see a good month of May and a very good month for June as well in terms of the equity market performance. What is the kind of outlook that you have for the month of July?

The markets are very much ahead of the curve in terms of the economy. We saw this after the global financial crisis as well. The markets recovered far quicker than the economy did aided by the central bank stimulus and the economy eventually caught up. So I think we have seen this to an extent. This obviously stalled in the second half of June, which inevitably could not continue to keep going at the current rate. I still think that the amount of stimulus is going to be supportive for some of these markets. When you look at the Dow for example, if we go through 25,000 and below that, then that could potentially trigger short-term correction that may make people feel a little bit more comfortable with where the markets are.

At the moment, given the economic growth, this seems really elevated but then the simple factor remains that if you see unprecedented amounts of fiscal and monetary stimulus, then it will tend to inflate these markets. Therefore, it really would not surprise me if in the normal circumstances, we may see a correction. And now we are not dealing with ordinary circumstances. It will surprise me if these markets did touch the momentum once again but at this moment of time, the charts are looking a little bit vulnerable.

Everyday we hear something about the US-China skirmishes on the trade front. Do you believe some of these tensions are happening only ahead of the November elections or do you read that there is something perhaps more to it than what meets the eye?

It is a combination of the two to be quite honest. Donald Trump has been picking many of these fights for the last four or five years. The nationalist message is something that he uses going into the election period. It helped him become elected in the first place. I expect him to try and get re-elected on the platform with nationalism and that means picking fights with countries and getting people on side. I think the coronavirus pandemic has massively threatened his ability to win the second term. I think he views the only way out of this is to start the anti-China rhetoric and very much ensure to his best efforts that the thing we are playing at this point is towards China and away from himself. But he faces a huge challenge now compared to what he was facing even six months ago. So I think we are going to see a lot more of this over the course of the next three or four months.

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