Geopolitical Tensions
In the middle of a pandemic, two of the world’s most powerful economies are embroiled in a new war of words surrounding the novel coronavirus. After two long years of trade tensions, the coronavirus blame game is creating a more divisive relationship between the two countries, making communications more difficult.
The Trump Administration is focusing on China’s lack of transparency and the early inadequate response to the virus, while China is looking at the US’ mismanagement of the virus, whereby the death toll is the highest in the world.
As the pandemic wreaks havoc on the global economy and creates divisive political stances between politicians, policymakers and advisers both internally and across the globe – the political dynamics have changed:
- Beijing appears to be at the forefront of President Trump’s election campaign. The immediate attention, therefore, switches on the tough stance on China rather than the government’s handling of the virus and the fallout of the US economy. National polls show that Joe Biden has a lead over President Donald Trump as the Covid-19 pandemic is casting another dark cloud on his troubled presidency.
- China has emerged from the worst of the crisis. Faced with an initial crisis of confidence, China’s successful containment of the virus has allowed President Xi to regain the trust of his people while casting aside the strict measures imposed in Wuhan. Amid accusations of an early cover-up and manipulation of data, China wants to be seen as the country that can end it all. China has pledged $2 billion to help the global fight against COVID-19 and claims that any vaccine discovered by them would be made a “public good”.
This week we also noted the stark warnings from the IMF to world government leaders against using the pandemic an excuse for protectionism.
Investors are navigating in a tough market where 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.
COVID-19 Updates
Moderna Inc, the Massachusetts-based biotechnology firm, announced some positive interim results of the Phase 1 Data for its mRNA vaccine, which has raised hopes of the Moderna team moving as fast and as safely as possible towards a vaccine.
At the World Health Assembly held earlier this month, the WHO passed a resolution to initiate a step-wise process of impartial, independent, and comprehensive evaluation. The WHO calls for the review to be seen as experience gained and lessons learned for better preparedness to ensure that the 2020 coronavirus pandemic is never repeated.
Doctors have warned that the new cluster of cases in China within the north-east region seems to carry the virus for a “longer period of time” and patients take “longer to recover” compared to the original outbreak in Wuhan.
Stock Market
Amid the struggles of reopening economies, geopolitical tensions, and some positive developments of the virus front, global equities swung between gains and losses as uncertainty prevails.
As of writing, major US equity indices were still up for the week, driven by the optimism from the reopening of economies and the large fiscal and monetary stimulus packages. Stocks in the European and US markets are flaring better than the Asia/Pacific region in the last five days.
World Equity Indices
Hong Kong shares took a beating on Friday and fell the most in almost two months as China moves to pass a national security law in Hong Kong that could disrupt the city’s high degree of autonomy.
Investors pulled from Hong Kong stocks after concerns that the controversial law would kickstart another wave of street protests and may also possibly force the US to reassess the special trading privileges of Hong Kong.
Forex Market
Economic reports continue to showcase the drastic impact of the coronavirus on the global economy. As risk sentiment fluctuates, the price movement in the FX space was mostly driven by the virus-related updates and geopolitical tensions.
The greenback eased against major currencies dragged by rising tensions between the US and China. The Antipodeans were among the best-performing countries as commodity prices firm, and both countries appear to have contained the virus better than their peers.
The Antipodean rose higher this week despite dismal economic data reiterating the economic pain:
Preliminary Retail turnover fell 17.9 per cent in April. Unlike March figures, which reflected the unprecedented demand in the food retailing industry and a mixed impact related to COVID-19 across industries, the figures have shown strong falls in almost every industry with no offsetting rises in the other industries.
Westpac Leading Index: The growth has collapsed from -1.06% to -5.16% in just two months. The speed of the collapse in the index is unprecedented as previous lows were a deterioration gathered over a period of six to twelve months.
The AUDUSD pair reclaimed and consolidated around the 0.65 level – a key psychological level to monitor before traders eye the 0.70 level.
The Reserve Bank of Australia’s less-dovish stance compared to other central banks, is an important factor behind the resilience of the AUD. The RBA has scaled down quantitative easing and appears reluctant to start negative rates.
The Pound struggled to edge higher despite a weaker US dollar. On the economic front, jobs reports have been mixed:
- The claimant count jumped by 856.5k, much higher than the 150k that was forecasted.
- ILO Unemployment rate dropped from 4% to 3.9%, which came below the 4.4% expected.
However, the main driver was the BoE’s stance on negative interest rates. After growing speculations, the BoE’s governor stated that negative rates were under review, which has kept a lid on the recovery of the GBPUSD pair.
Despite positive headlines that are driving the markets, virus concerns, uncertainties, and geopolitical tensions are creating an environment of caution. After surging to more than 7-year high, the XAUUSD pair traded in a tight range around $1,745 before retreating to $1,725.
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