China: advance or nonsense for technology investors?
America and China are vying for technological power. What about the rise of humanoid robots and quantum computers, for example? Will China become the next superpower? Mark Van Assche, account manager Private Banking and Wealth Office, talks about it with Anthony Cruysmans, equity portfolio manager at KBC Asset Management.
04/06/2025
Economy
- The American consumer is pivotal to the US economy. However, the trade war is creating a huge amount of uncertainty. With a temporary truce being declared (including with China), an escalation seems to have been avoided. Our economists expect growth to be meagre in the second half of the year.
- In Europe, additional public spending on defence and infrastructure appears to be bolstering optimism about growth in the medium term. However, the expected boost to growth may be tempered by US tariffs.
- Retail sales in the US were somewhat weaker than expected, but when disregarding the volatile components in the control group, some growth is visible. All in all, an ambiguous picture.
Commodity prices - inflation
- For the time being, inflation rates are continuing to move in the right direction, thanks in part to lower oil and gas prices. The latest official inflation figures also confirm this trend in both the US and the euro area.
- Trump's policies are expected to send inflation systematically higher over time. Oil prices are rebounding in response to the escalation of violence between Israel and Iran, but production surpluses and unutilised reserves are sufficient such that a rise in prices should remain relatively limited.
Fiscal and monetary policy
- The 'Big Beautiful Bill' could potentially add 4 trillion dollars to the US budget deficit over the next 10 years. It seems unlikely that the US can offset this through savings or income from import tariffs.
- China continues to regularly support its flagging economy through new policy decisions. In the euro area, the major investments announced for defence and infrastructure are gradually taking more concrete shape, although it looks like their impact won’t be felt until 2026-27.
- In early June, the ECB implemented its eighth consecutive rate cut, bringing the deposit rate to 2%.
- The Fed again confirmed its decision to pause cutting interest rates. Moreover, it expects to cut rates only twice this year, and less in the following years than previously indicated. The Fed continues to underline the widespread uncertainty resulting from Trump's trade policies.
Bond markets
- Bond markets are also reeling from the trade war and are anticipating an adverse impact on economic growth and (expected) further cuts in key rates. As a result, yields are falling on sovereign bonds.
- This is largely offsetting the increase in German interest rates at the start of this year.
- US interest rates are falling less sharply for now, as the uncertainty surrounding US debt has increased.
Stock markets
- Taking a 90-day pause before the high import tariffs of ‘Liberation Day’ take effect has given stock markets some breathing space, especially now that a similar agreement has also been reached with China.
- Company results that clocked up better-than-expected earnings growth of 10% in the US and limited the damage to -5% in Europe have also supported sentiment. However, another feature of the results season was that many companies downgraded their forecasts or even stopped publishing them given the high level of uncertainty. Analysts are still adjusting their projections for earnings growth downwards although the pace has slowed slightly.
Risks
- The conflict in the Middle East and Ukraine could continue to cause nervousness. What will happen to the aid to Ukraine?
- Meanwhile, the long-standing conflict between Israel and Iran turned violent once again. This could certainly dominate the markets in the coming weeks. The crucial question is whether or not the US will get involved in the conflict.
Fed confirms interest rate pause amid outbreak of violence in the Middle East
Siegfried top, Senior Investment Strategist KBC Asset Management
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