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US Civil Unrest - How Might It Affect Markets?




Markets have thus far largely shrugged off the impact of widespread civil unrest in the USA in wake of last week's killing of unarmed black man George Floyd whilst in police custody. 


You might assume that civil unrest = bad for the economy = bad for stocks and other risk assets. You might well be right! We have no idea yet how things in the US will play out. 


But you may well also be wrong. One of the chief economists from Fidelity shared some interesting analysis on social media earlier - he showed how in 1964, at the peak of the civil rights movement to counter institutionalized racism & segregation in the USA, stocks continued higher for pretty much the entire year. 


Again, there is no guarantee that history will repeat itself, not least when you throw a global economy crushing pandemic into the mix. 


Here is how civil unrest might affect the broader geopolitical picture this time around, and how that theoretically could affect markets…


Firstly, it is worth pointing out the obvious; the longer and worse the unrest becomes, the greater the negative impact on the economy will be (and likely the worse the impact on markets will be). 


Bear in mind, the US economy is already in a VERY fragile state (unemployment is near 20%, remember and consumer confidence is already at historic lows). Unrest will only slow the economic recovery by giving investors, businesses, and consumers, who have all been grappling with the effects of the pandemic, another thing to worry about. 





A second thing worth thinking about is how the unrest might influence US President Trump’s foreign policy stance. 


According to the latest US polling, a rival candidate for President Joe Biden holds an 11% lead over Trump at the moment (when voters were asked who they would vote for). Trump’s leadership during the Covid-19 crisis failed to result in any noticeable bump in his approval ratings (unlike with many other world leaders). 


Given his track record of handling crises, one can assume that the present civil unrest situation is also unlikely to work out positively for the President’s rating. 


If his approval ratings do continue to slide, we might see him become more “desperate” ahead of the election, which could eventually manifest itself in Trump’s stance on China becoming increasingly hawkish - after all, American distrust of China is at an all-time high. 


More US action vs China can only be a risk appetite negative. 


Moreover, might China see this as a moment of US weakness in which it can “get away” with more of the things that the US would typically have complaints about (expansionist military policy, cracking down on Hong Kong freedoms etc.). 


If the US rolled over and allowed all of this to happen, then it would not be a risk appetite negative. But as noted above, the President’s incentives to turn up the heat on China at the moment are high.


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