Week Ahead – Sino-US Tensions Come to the Fore

Hong Kong the Focus of Deteriorating US-China Relations

This week the focus has been less on the pandemic itself and instead on economies reopening, recovery funds and the intensifying US-China conflict.

What started with the US blaming China for the severity of the pandemic has evolved and is likely to deteriorate further in the coming weeks and months.

This is expected to be a common theme next week. With the President facing an election in November that only six months ago looked a foregone conclusion, the China bashing may be turned up a number of notches.

Key Economic Releases and Events

Sunday 31 May

Monday 1 June

Tuesday 2 June

Wednesday 3 June

Thursday 4 June

Friday 5 June

Country

US

The focus in the US will primarily be on its confrontation with China, job destruction, and the signs of stabilization in some parts of the economy.  President Trump seems determined to shift the focus away from his handling of the coronavirus pandemic and positioning for a long battle with China on Hong Kong’s security law, sanctions for treatment on Muslim minorities, living up to their end of the phase-one trade deal, and the yuan’s devaluation.  If the US announces fresh tariffs, China will not wait too long to counter, and eventually a tit-for-tat battle will weigh on risk appetite.   

On Monday, the ISM manufacturing survey is expected to rebound slightly after having the fastest decline dating back to 1948.  Dramatic weakness with factory output should start to benefit from the staggered reopening of the economy that took place in May. 

Friday’s non-farm payroll report will draw much attention as the unemployment rate is expected to rise to 19.5% after 8-million jobs were lost in May.  May’s jobless rate should be the peak and investors will look forward to focusing on the economic rebound going forward. 

The reopening of the economy trade and promise of more stimulus continues to drive risky assets and as long as lockdowns continue to ease, the economic recovery is expected to remain intact.  

US Politics

US states must decide whether they will continue to move forward with reopening plans even as some are reporting spikes higher with new cases.  The next several weeks will be key in whether the easing of lockdown restrictions continue. 

Another focal point will be the nationwide spread of protests over the police killing of George Floyd.  Protests have erupted and turned violent across the nation.  

UK

The UK is continuing to ease lockdown restrictions, with non-essential shops due to reopen on 15 June. This will see the country returning to something resembling pre-lockdown, although the hospitality industry remains in limbo. 

Europe

The European Commission unveiled its recovery fund plans this week which, alongside the EU budget and the rescue fund, will see €2.4 trillion spent over the next seven year budget. This will consist of the normal €1.1 trillion budget, €540 billion rescue fund and €750 billion recovery fund. The latter is being proposed to be raised in the markets by the EC – the first time it’s done so for an amount of this size – and backed by all 27 members. What’s more, €500 billion will be offered as grants, with the remaining €250 billion as loans. This is something the “frugal four” – Netherlands, Austria, Denmark, Sweden – are not currently on board with.

The ECB meets next week and there are growing expectations for an increase in QE by €500 billion, taking total purchases this year to €1.6 trillion. 

Turkey

Turkey is planning to ease lockdown restrictions from 1 June which will allow beaches, restaurants and more to reopen, while also allowing for the resumption of internal travel. 

The lira has come off its lows since early May but remains vulnerable and the trend has changed over the last few days. If this is extended, we should expect more intervention.

China

China’s CPC passes security law for Hong Kong. US President to hold a press conference Friday. Escalating protests in Hong Kong. Depending on the US response, we could be back in a trade war scenario. USD/CNY fix at 12 year high today , raising prospects of more escalation with the US. outright trade hostilities negative for China and regional equities and currencies.

This weekend, China Manufacturing and non-Manufacturing PMI are releasedr. A large miss lower will see Asia as a whole move sharply lower Monday.

Hong Kong

China announces intention to write security legislation into basic law, bypassing the HK legislature. The US announced the end of special trading status for HK.  This news spells a very real chance that Hong Kong as we know it is over. Renewed street protests. Big winner, Singapore.

India

Nothing of note this week.

Australia

Tuesday RBA rate announcement, expected unchanged. Wednesday GDP. Both the currency and stocks are looking tired after decent rallies. Potential for downward correction. Escalating trade tensions are very negative for Aust. markets and currency.

Japan

Second extra budget announced totalling $1.1 trillion. Market response is muted although Nikkei continues to power higher on global recovery trade. Equities are vulnerable to a sharp sell-off if US-China escalates. No data of significance.

Market

Oil

The oil price recovery has well and truly stalled, with WTI and Brent off a few percent today, after EIA reported another large inventory build on Wednesday. This comes as market sentiment turns south on souring US-China relations. It’s been some recovery for crude prices so a period of profit taking can only be healthy. With economies gradually reopening, there’s plenty more time for upside, assuming it all goes to plan of course. Huge risks remain but the early signs are encouraging.

Gold

Gold is up half a percent in early Friday trade, buoyed by a slight softening of the dollar as it continues to bounce off key $1,700 support. I don’t think anyone is getting carried away just yet, any rally feels like a monumental effort at the moment and even when breakouts occur, there seems plenty of sellers willing to come in and fade the move. We may see more of this in the coming sessions.

Bitcoin

Bitcoin has broken back, and held, above $9,000, although it is coming under a little pressure today. That will come as a relief at a time when it was starting to look a little vulnerable. Post-halving consolidation will be perfectly acceptable, as long as the pre-halving gains aren’t wiped out, which could happen in the event of a break below $8,000. 

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