Rising trade wars amidst a Pandemic

Brewing geopolitical risks helped investors take some risk off the table heading into the long weekend. The dollar rallied against most of its peers as tensions remain front and center for the world’s two largest economies. Renewed unrest in Hong Kong will continue to weigh on the overall outlook as Western nations contemplate how to react to China’s new national-security laws in Hong Kong. Investors will also continue to focus on the easing of coronavirus lockdowns globally, signs of rebounding economic activity, and any progress with the treatments or vaccines for COVID-19.

This week is a relatively lighter week, with U.S. markets closed for Memorial Day on Monday. The most important U.S. event risks will be consumer confidence, which should be stronger, revisions to Q1 GDP, personal income and personal spending. Fed Chairman Jerome Powell also speaks at the end of the week.

Here are the key-pointers for major economies and markets:

Country

US-China relationship deteriorates even further

1. The US economy is showing small improvements with the labor market and business activity, but concerns are growing that optimism will quickly fade if the US-Chinese relationship deteriorates even further. China’s new law on Hong Kong will likely see US legislation sanction them, likely triggering a tit-for-tat response from Beijing.
2. Tensions between the world’s two largest economies will remain tense beyond the Presidential election and that could have a lasting impact on the dollar.
3. Damage to the economy from the coronavirus pandemic continues to ease as the economy reopens, but investors could quickly turn cautious if spikes of new cases turn up with some of the states that were on the earlier side of reopening.

UK’s Brexit back under the limelight

1. Speculation about negative interest rates in the UK is rife and BoE Governor Andrew Bailey only added fuel to the fire by refusing to rule it out, although he did not rule it in either. Rather, it’s under review.
2. Given the BoE’s previous stance on negative interest rates, that is a big change. Some easing is expected in the near future, either in the form of a rate cut, or more QE, which explains why the UK government was able to borrow at a negative interest rate on 3-year debt for the first time ever this week.
3. Brexit is back in the spotlight a little and contributing to general weakness in the pound. The coronavirus crisis has changed nothing as far as the government is concerned and this week, they released tariff plans starting next year. But to no-deal Brexit at this point would be suicide.
4. A transition extension is still likely or at worst, a very broad outline of a deal that will be beefed up in the years after Brexit. That may depend on the EU’s willingness to accept the latter, with the crisis arguably giving them a little more leverage.

Europe’s long-lasting COVID-19 impact is greater than anticipated

1. The ECB is expected to increase its Pandemic Emergency Purchase Program by 200-500 billion Euros from the initial 750 billion Euros as early as next month. It is also providing incentives for the market to do some heavy lifting too. In the market’s vernacular, it is called “carry-trades”, buying peripheral debt.
2. Figures revealed the damage the Covid-19 has inflicted across the continent which seems to be far greater than what was anticipated.

Australia re-emerging from lockdown

1. Australia is emerging from lockdown in a positive position.
2. The AUD and NZD rallied strongly on the peak-virus trade but both fell heavily after the Hong Kong announcement, and increasing trade tensions between China and the US. AUD and Australian equities are extremely vulnerable to further escalations in US-China relations.

China, once again, a hotspot for geo-political unrest

1. China is facing criticism on multiple fronts and is now changing Hong Kong’s basic law directly, circumventing the HK legislature.
2. Howls of indignation and the threat of US retaliation is real over it is real. US-China trade relations were in trouble already and the heat has now ramped up. The real concern that a new trade war could emerge is very negative for Chinese markets.
3. In recent weeks, tensions have flared between the U.S. and China, with the U.S. calling for China to take responsibility for the COVID-19 outbreak. The U.S. threatened to delist Chinese companies from exchanges, restrict new companies from listing, cap American exposure to Chinese investments, warn of further tariffs “economic penalties” and approved a controversial arm deal with Taiwan.

Japan Leading Index Lowest Since 2009

1. The leading index, which measures the future economic activity, fell to 84.7 in March from 91.9 in the previous month. The preliminary score was 83.8. The final reading was the lowest since June 2009.
2. Bank of Japan announced extra stimulus measures with little market reaction. Japanese markets are highly sensitive to moves in US-China relations and trade fall-out. That will dominate the news next week.
3. An escalation is expected to be negative for equities, but positive for the JPY as a haven currency.

Market

Oil markets rebalancing

1. The oil market is rebalancing, but rising doubts over the outlook for crude demand will likely keep the recent rebound in check.
2. China’s economic recovery saw crude demand return to near pre-pandemic levels, but the outlook is starting to look worse amid concerns that China’s proposed security law for Hong Kong will further escalate US and China tensions and lead to economic penalties. If Asia starts to see lower growth prospects that will continue to weigh on oil prices.
3. On the supply side, production cut efforts have been surprisingly compliant but that should not last as oil-producing nations will want to make sure they don’t lose market share. WTI crude will struggle to rally above the $40 level and should start to settle on a wide $25-$35 trading range.

Gold, a safe-haven amidst geopolitical unrest?

1. The gold trade was overcrowded and calls for a bear trap were growing, but China’s decision to impose national-security laws in Hong Kong brought back another challenge facing the world’s second-largest economy.
2. The global economic recovery is very fragile and geopolitical risks and trade tensions will likely keep demand strong for safe-havens.
3. Gold’s recent bearish catalyst has been the relatively good start to the reopening of the US economy.Trade suggestions:
   XAUUSD: BUY at current rate: TP 1730.10/1733.33 | Sell at 1735/1737 TP 1730
   XAGUSD: BUY at current rate: TP 17.555, 17.777 | Sell: Not suggested

Here’s a look at all the important market-moving factors for the week:

Week Ahead

All times listed is EDT

Monday

US and UK markets closed for Memorial Day and Bank Holidays respectively.

2:00: Germany – GDP: seen to remain flat at -2.2%.

4:00: Germany – Ifo Business Climate: expected to rise to 78.3 from 74.3.

Tuesday

10:00: US – New Home Sales: probably fell to 490K from 627K.

Thursday

8:30: US – Core Durable Goods Orders: anticipated to plunge to -14.0% from -0.6%.

8:30: US – GDP: forecast to remain flat at -4.8%

8:30: US – Initial Jobless Claims: predicted to come in at 2,000K after last week’s 2,438K.

10:00: US – Pending Home Sales: seen to rise to -15.0% from -20.8%.

11:00: US – Crude Oil Inventories: last week’s EIA release showed a drawdown of 4.983m bbl.

Friday

5:00: Eurozone – CPI: likely to drop to 0.1% from 0.3%.

8:30: Canada – GDP: forecast to plummet to -9.0% from 0.0%.

Saturday

21:00: China – Manufacturing PMI: expected to edge higher to 51.0 from 50.8.

Based on the above factors and the events lined up for the week, the analyst at RvR Ventures suggests you to Trade responsibly; invest only as much as you can lose. All the profits and losses due to the above data are your own personal responsibility. Kindly practice money management & risk mitigation while trading.

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