22-May-2020

1) The China – US Dispute Is Pulling Markets Down Again
2) Pandemic Costs Become Clear As UK Borrowing Surges to a Record
3) EUR/USD Turning Down or Ready to Hit the Highs?

 

 

1) The China – US Dispute Is Pulling Markets Down Again

The problems between China and the U.S. are far from new. But it seems that politicians on both sides were toughening bilateral rhetoric until it began to have a visible impact on markets. On Friday, Hong Kong’s Hang Seng index was down 3.7% after falling 3% a day earlier. The pressure on it was caused by Beijing’s move towards more control over the former British colony, which has preferences from the United States. The decision, which had previously caused unrest in Hong Kong, is also attracting increased attention from the West. Donald Trump said he would respond “very strongly” to these legislative initiatives in Beijing.

The decline in Hong Kong dragged Asian markets down and returned the Chinese yuan above 7.14 per dollar, where it was only in the most acute phases of trade disputes and market turbulence.

Besides, the nervousness of the markets reinforces that China abandons its GDP growth target for this year. This indicates a high level of uncertainty in the economy even after the end of the tight quarantine. China’s cautious mood weakens hopes that the economy will recover evenly after quarantine.

Elsewhere, the U.S. has announced its withdrawal from the Open Skies treaty, which brings back fears of a new round of arms race. Although this could be a prologue to another Trump’s “Great Deal”, fears of a spiral of geopolitical tension and fragmentation have increased in the markets during difficult times for the world economy.

Recall that it was the combination of economic decline and rising protectionism that led to the Great Depression of the 1930s. At the same time, the Spanish flu became a prologue to the “Roaring Twenties”. After all, after the First World War and the deadly disease that took the lives of 50-100 million people, but after this, the world became more global. However, protectionism is now increasing in world politics, which is further worsening world trade conditions and undermines the potential for recovery.

Further intensifying of geopolitical tension can return markets to a steady decline. It is unlikely to be as pronounced as it was in February-March, but it could be much longer by returning stocks to the bear market.

 

2) Pandemic Costs Become Clear As UK Borrowing Surges to a Record

Another big rise in US weekly jobless claims along with a sharp rise in tensions between the US and China saw equity markets fall back from their weekly highs yesterday, as once again investor caution, overrode the early exuberance we saw at the beginning of the week.

Asia markets have ended the week on the back foot, reacting to China’s more aggressive interventions in Hong Kong’s internal governance, by way of a new national security law, which could reignite the unrest that was a hallmark of last year. President Trump has already indicated that any actions to this end by China could well prompt a US response, which could raise tensions even further. These tensions are unlikely to go away with the US election looming in November, which means investors will not only have to contend with concerns about the economic damage caused by the pandemic, and the speed of any recovery, as well as a second wave of infections, but also with concerns over US, China relations. As if life wasn’t complicated enough.

These concerns of a renewal of US, China trade tensions after the positivity of earlier in the week as economies tentatively start to reopen, has translated into another shift in sentiment as the optimism of the earlier this week gives way to concern, over future US, China relations as we head into the weekend.

Markets here in Europe have opened sharply lower, dragged down by the sharp falls in Asia, led by markets in Hong Kong which look set to post their biggest one day fall in five years.

HSBC and Prudential shares are amongst the biggest fallers in early trading as a result of this rise in US, China tension and concern over the prospect of further unrest in Hong Kong, given their large exposures to the region.

Luxury fashion retailer Burberry has had to contend with a number of challenges over the last 12 months, from the disruption of its Hong Kong business as well as the fallout from weaker Chinese demand, and the spread of coronavirus for this year. In March the company said that retail sales in their Asia stores were down 40% to 50% over the previous six weeks, with Q4 sales expected to be lower by around 30%. Today’s full year numbers reflect those difficulties, and while Q4 sales eventually came in slightly better, falling 27%, the costs of the recent economic disruption were very apparent. Having already taken a £14m charge last November, due the unrest in Hong Kong, this was adjusted higher to £245m, for the full year as a result of Covid-19, as operating profits slid 57% to £189m. Total revenues for the year came in at £2.63bn.

The various cost savings in terms of the dividend cut, as well as drawing down various cash flow facilities, has also resulted in the company pulling its guidance with management saying that they expect Q1 to be severely disrupted with still 50% of its store network closed. In terms of silver linings sales in mainland China and Korea are ahead of last year, though that may not last if tensions in Hong Kong flare up again, which increasingly looks likely given this morning’s news out of China.

Transport provider and owner of the Thameslink and Southern rail franchise Go-Ahead group has outlined a trading update in light of the financial support the rail industry received as a result of the loss of revenue caused by the lockdown of the UK economy in March. Unsurprisingly it has warned that profits are likely to come in below expectations due to the disruption caused by coronavirus, with the shares sharply lower in early trading.

With rail services across the UK operating at 75% of typical service levels, and at similar levels in its German and Norway markets the company has said that profits for rail are likely to come in between zero and £4m.

The picture is not much better when buses are included with overall group operating profit expected to fall from last year’s £121m to between £63m and £75m with performance only slightly better from its London, Singapore and Ireland operations, while UK regional services have had to run at reduced levels, also with the help of government support.

As a result, the company is expecting to reduce capex from £140m to £90m, which along with the suspension of the dividend has helped bolster the company’s finances. Unsurprisingly management declined to provide guidance for the upcoming year.

As bad as March’s 5.1% decline in UK retail sales was, today’s April numbers were even worse, with consumers pretty much confined to their homes, spending slumped to a record low of -18.1%.

While food sales inevitably saw slightly higher than average levels of spending, due to everyone being at home, they did slip back a little as a result of the strong performance in March, which was driven by stockpiling, they could in no way compensate for the sharp falls in fuel and energy, as cars stayed on the driveway. On most measures we saw big falls in clothing, department stores and household goods due to non-essential stores being closed.

On the plus side, and this was the only one, on-line shopping saw a 30.7% increase led by clothing and footwear which saw a 41% rise. Alcohol sales also saw an increase.

UK public sector borrowing also rose sharply in April as the costs of the governments interventions to cushion the effects of the coronavirus outbreak started to kick in. In March the UK government borrowed a revised £14bn, however this rose sharply in April to £62bn, as the government furlough scheme started to make itself felt. None of these numbers should be a surprise to anybody, and explain why the pound’s reaction was fairly muted, as every other country is in the same leaky boat. These numbers are expected to go even higher given that the furlough has been extended into October. The reaction of the gilt market has been fairly sanguine with yields continuing to fall, with the 5-year yield hitting a new record low of -0.03%

This morning’s news that the Bank of Japan announced another stimulus program in the form of a new $280bn lending program for banks, targeted at small and medium sized businesses, was almost a foot note, as the country struggles to drag itself out of the weak inflation low growth environment that has dogged it for years.

US markets look set to take their cues from the weakness in Asia markets as well as here in Europe with a sharply lower open.

In earnings news Chinese online retailer Alibaba is also set to reveal its latest full year numbers before the US open, along with Q1 numbers from Footlocker, and Q2 numbers from Deere and Co.

 

3) EUR/USD Turning Down or Ready to Hit the Highs?

The gong from Hong Kong – long days of simmering tensions between the world’s largest economies have finally hit markets when China moved against Hong Kong’s freedoms. In its National People’s Congress in Beijing, officials presented a new security law that tightens China’s group over the cit-state.

The move angered citizens of the financial hub, which are set to demonstrate in droves over the weekend. It also angered American lawmakers, who have already been moving forward with laws scrutinizing China’s commercial activities. Both countries have also been clashing over coronavirus.

As markets – from HK’s Hang Seng to major indexes in the US and Europe – are falling, the safe-haven dollar is benefiting from demand. Will this trend continue? There is one silver lining for investors – both countries have vowed to hold up the trade deal signed early in the year.

There is probably a greater chance that markets will focus on the “glass half empty” ahead of the long weekend in the US, avoiding risks.

Investors seemed to ignore rising unemployment in America, as both initial jobless claims and continuing ones came out worse than expected. Business confidence advanced according to Markit’s preliminary Purchasing Managers’ Indexes for May. Nevertheless, economic activity remains subdued in the US and in most of the world.

In the old continent, the European Central Bank releases its meeting minutes later on Friday. The document may shed some light on deliberations regarding adding more stimulus. The protocols are from the late April meeting, before the German constitutional court’s ruling that the bank’s bond-buying scheme is partly illegal.

Christine Lagarde, President of the ECB, called on governments to do more. Germany and France announced a plan for a €500 billion fund early in the week which has been met by objections from several northern countries.

Coronavirus cases and deaths remain at low levels in Europe’s largest countries, which continue gradually opening up. Protests for faster loosening of restrictions are expected in Germany and other countries over the weekend. In the US, the pace has dropped, but the US is losing over 1,000 people every day.

Momentum on the four-hour chart has all but disappeared, but EUR/USD is still trading above the 50, 100, and 200 Simple Moving Averages, a positive sign. The Relative Strength Index has stabilized after previously staying at overbought conditions.

Support waist at 1.0895, a high point last week which has almost been touched on Friday. It is followed by 1.0870, where the 100 and 200 SMAs converge. The next lines to watch are 1.0820 and 1.0780.

Resistance is at 1.0920, a support line from early in the week, followed by 1.0950, a separator of ranges. Next up, 1.0975 and 1.10 await the currency pair.