Geopolitics A Ticking Bomb?

Eleanor Creagh

Australian Market Strategist, Saxo

Summary:  Asia equities broadly higher and sweeping aside the mounting tensions between the US and China, instead focusing on the perceived positives which have driven risk assets in recent weeks. Namely reopening economies, slowing COVID-19 case growth and expanding central bank balance sheets.


We still maintain, the failure of the S&P 500 to sustain above the bear market retracement zone, bears watching into tomorrow’s cash session (US markets closed for Memorial Day tonight) particularly as sentiment continues to flip flop and upside momentum looks to be stalling. However, as we have previously noted, risk assets are not being driven by pervasive uncertainties and reopening realities. The hope trade is firmly rooted in abundant liquidity and the promise of more if necessary, along with the speculative flows of retail traders driven up the risk spectrum via the lack of alternative (TINA) and the expectation that rates will remain low for an extended period. The rise of zero commission trading and ease of online account opening has fuelled the retail flows, which in the long run may serve to democratise financial markets. However, there is also the continued expectations that central banks will fix all ills and are equipped to backstop asset prices against a fundamental backdrop that has arguably never been so uncertain. The sharp rebound of March lows in turn drives continued speculative behaviour, as the fear of missing out (FOMO) becomes a driver and in this paradigm markets remain biased to the upside.

Fundamentally, it seems markets have run ahead of reality in pricing the recovery, particularly given a wide range of consumer, economic, and pandemic (vaccine/2nd wave) probabilities exist. For that reason, we remain on high alert for the “trading on hope” narrative reversing and remain cautious on the short-term risk reward across equities at present levels.

Are rising US/China trade tensions enough to snap the positive bias? Markets have typically traded on the hope that the rhetoric is worse than reality when it comes to the US/China disentanglement. Now it seems that each day brings fresh evidence that the relationship has permanently changed and the global geopolitical architectures, which have long been fraying, are moving closer to breaking point. The ideological differences and political fragmentations that drove the original US/SINO confrontations are on full display and the tectonic shifts like, the East/West divide, Splinternet, and supply chain relocations we talked about when trade tensions first emerged are now coming to fruition. Beijing revealed plans on Friday to impose laws on Hong Kong that would ban subversion, secession, foreign interference and any acts that threaten national security. With China’s strike on Hong Kong comes the ultimate test of whether this US administration’s hawkish position on China “bark” is worse than the “bite”. Particularly as the tough stance on china plays into the election strategy and diverts attention from the handling of the health crisis, whilst shifting blame to China.

The rebuttal from the US will be closely watched, to date White House economic adviser Kevin Hassett has stated that the US government is “absolutely not going to give China a pass” and is threatening punitive actions. Revoking Hong Kong’s special trading status, along with sanctioning individuals and entities involved in enforcing the proposed new security law in Hong Kong have been floated, but talk is cheap and we await the US response.

Although the CNY fix today was stronger than estimated, illustrating the PBOC acted to slow the CNY decline, the fix was the weakest since 2008. USDCNY bears watching closely as a barometer of China’s intent and proxy for the state of US/Sino relations, the PBOC has previously made it very clear the Yuan is not a one-way bet and do not want a disorderly panicked move. However, the slow and steady depreciation is in play. The yuan will weaken to offset renewed tariff risk but also remains under fundamental market pressures. As the $CNY exchange rate approaches 7.20, no doubt angst will be on the rise but the manner of the depreciation will determine the resultant risk asset response. The more disorderly, the greater the fallout.

Source: Bloomberg

As the US and China go head to head in the battle for hegemony, Australia is caught in the middle of the two superpowers. With the mounting US/China tensions comes an increasingly difficult trajectory for Australia to navigate.

Global times, Australia should distance itself from a possible new China-US ‘cold war’

Mike Pompeo warns US could 'disconnect' from Australia over Victoria's Belt and Road deal

Balancing the ideological and national security allegiance with the US and the trade relationship with China leaves Australia in a difficult position. Although the Australian government have asserted that Australia is not under pressure to pick sides. Recent actions and commentary from both China and the US appears to the contrary. China’s dominant purchasing position for Australian goods potentially comes with a price Australia is not willing to pay, as recent support of the independent investigation into the origins of COVID-19 have prompted retaliatory reactions from China motivated by economic coercion and resulted in tariffs on Barley imports to China and the banning of some beef imports. By this token, the pandemic outbreak could prove a pivotal moment for the long run relationship between China and Australia. Whilst the present industry attacks are no doubt harmful at the individual level, in terms of the broad GDP impact they are minimal. However, China accounts for more than 30% of goods and services exports and a more serious reduction in Chinese demand like a consumer boycott of Australian goods and services exports (education/tourism), targeting iron ore, or coal exports would pose a far greater and more damaging impact.

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.