Markets are Down on US-China Tensions

What's New

. Stock markets were down and major currencies remained largely flat in the Asian session today, as investors eagerly await for the US response to China's newly-announced measures on Hong Kong.

. MSCI Asia-Pacific (ex. Japan) was down 0.3%, driven by a drop in the Hang Seng by 0.4%, with the Nikkei standing also slightly on the negative. S&P500 Eminis are currently down 0.4%, the same as Nasdaq futures.

. Yesterday, China's Parliament moved ahead with the national security legislation on Hong Kong, with the city's residents fearing about the future of their democratic freedoms. US President Donald Trump has vowed a tough response and will hold a news conference later today. A new round of US measures against China is very likely to trigger a new phase of the trade war between the two countries. This has kept investors weary of the future, with the stock market appearing too fragile to sustain a new bout of fighting between the two superpowers.

. As analysts note, US possible responses could range from breaking the Phase 1 deal, to imposing new tariffs or to milder travel and financial sanctions on the country's officials and companies. If the response is on the mild side, then markets are certain to jump at the news.

. The offshore Yuan is currently trading near its record low of 7.1966, reflecting these developments.

. Still, the market has registered its best May for at least 10 years, with the S&P500 up 4% so far. Indicative of the positive feeling and the move towards a risk on sentiment is the fact that the Aussie dollar has gained almost 2% during the month, even though the rally is slowing.

. The improvement in market sentiment stems mainly from the fact that developed countries are opening up their economies after the pandemic, with hopes that this will be just a passing issue and no lockdown will re-emerge in the future.

. Data releases appear to support this theme, with the number of new jobless claims dropping for the eighth straight week.

. In the currency markets, the euro is headed for the best month since December, aided by the EU's announcement of a 750 billion euro recovery fund. The common currency stood around $1.1073, close to the 1.1094 two-month high hit overnight.

. On the other hand, calls for the resignation of an influential aide to Boris Johnson, fear about negative interest rates, and lack of progress in EU trade talks could potentially hurt the Sterling, which is on course for its second week of gains.

. Investor worries kept pressure on the price of Oil, with the two main types dropping by around 1%, as fears of a slowdown in demand due to the trade tensions increase and counter the positives from the reopening of world economies.

. Earlier today, Japan's inflation data were better than expected, with the Tokyo CPI coming out at 0.2% y/y, versus expectations of -0.2%. However, industrial production in the country dropped by 4.5% y/y in April, while retail sales were also down by 13.7% y/y, as a result of the virus spread.

. In Germany, retail sales were down by "just" 6.5% versus expectations of a 14.3% drop. At the same time, German import prices dropped 7.4% y/y aiding the country's trade balance.


Up and Coming

. Italy's GDP release stands out today, with expectations suggesting a 4.8% y/y drop in the country's output in the first quarter of the year. Similarly, France's GDP is forecast to have dropped by 5.8% q/q.

. The EU's core and headline CPI data are due today, with forecasts suggesting a barely positive CPI release.

. For the US personal spending is seen to have taken a plunge in April, with a 12.6 m/m drop expected, while core PCE is expected to come out at 1.1%. However, the Chicago PMI is seen to have improved even though still have remained below 50.

. Canada's GDP for 2020q1 is seen to have dropped by 10% q/q on an annualized rate, suggesting that Canada may have suffered more than first anticipated.