Reopening Economies v/s ‘New Cold War’

In the middle of a pandemic, two of the world’s most powerful economies are embroiled in a series of clashes, could take both countries to the brink of a “new cold war”. The latest fallout is in regards to China’s move to pass a national security law in Hong Kong, which could compromise the independence of the city.

China is facing international backlash given that the controversial law might tighten its grip over the former British colony. As a dominant Asian financial centre, the law is poised to muddle with the free and democratic capitalist system of the city. The security law would likely place autonomous Hong Kong governance under the “one-country two systems” principle and has prompted political figures around the world to swiftly condemn the move.

The US will likely impose sanctions if China moves ahead with the Hong Kong law, although China is insisting that it remains an internal affair and there should be no meddling from the international community.

Forex

It will be a muted start to the week with holidays in the UK and the US on Monday. Although the gradual easing lockdown measures are an important positive theme for the markets, brewing tensions between the US and China will gather much attention at the beginning of the week.

After the US dollar struggled to find a firm upside direction following the latest stimulus measures announced by the Fed, the greenback cautiously edged higher towards the end of last week due to its haven status. Amid the US-China tussle, the greenback could gather strength against its peers if the war of words persists.

Commodities and sentiment-linked currencies, the Australian and New Zealand dollar were among the best performers last week. However, both the AUDUSD and NZDUSD pairs are seesawing between a tight range. With a relatively empty calendar, the Antipodeans will likely remain at the broader sentiment of the markets and be driven by geopolitics and virus updates.

The Pound struggled to edge higher despite a weaker US dollar; dragged by dismal economic reports and heightened expectations of negative rates in the UK following the BoE’s comments. Brexit is also fueling the downward pressure on the Pound. Negations between the EU have stalled and the UK is preparing for a no-deal scenario. Unlike its peers, the UK is viewed as slow in easing lockdowns given its high COVID-19 mortality rate. The GBP pairs may remain on the backfoot faced by pressures from the economic and political fronts.

The fact that Europe may have gone through the worst phase of the coronavirus has somewhat eased the downside risks of the shared currency. But the current geopolitical tensions with China and the massive EU recovery fund proposed by Chancellor Angela Merkel and President Emmanuel Macron may not bode well with the recovery of the Euro.

The recovery plan might further highlight the differences between the Northern and Southern member states and worsen the political atmosphere within the Eurozone. Given that the COVID-19 fund puts additional pressure on the EU, the upside momentum of the shared currency could be contained.

Commodities

As global activities slowly started to pick up, the prospects of increasing oil demand are also improving. A combination of production cuts and buoyant inventory reports are, therefore, providing a better supply-side narrative.

Demand and supply fundamentals are getting better which is helping the oil market to recover from the coronavirus plunge. However, geopolitical tensions have overshadowed the recovery of oil prices. Traders will likely keep monitoring the weekly oil reports and US-China war of words for fresh trading impetus this week.

Equity

Global equities have experienced a staggering recovery in the past month. However, the pace of the rally in the stock market is ebbing as investors are cautious. The escalating tensions between the two largest economies could have more lasting impacts than the negative effect of the coronavirus and the threat of a second wave of outbreak.

The Asian region will be closely watched as the controversial security law for Hong Kong which will likely disrupt one of the biggest financial hubs. The Hang Seng index dived on the news and will likely drag down sentiment in broader Asia.

Key Market Events for the week

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