Poking the trade war hornet’s nest
With the US administration poking the geopolitical hornet's nest with accusations that a Wuhan lab is the epicenter of Covid-19 and investors fretting about the "new normal" profit bottom lines for the stock market on stock darlings, this could be an absorbing month for risk as traders are starting to positioning for volatility event risk in May with an eye on June and July.
President Trump is back beating the trade war drums this morning, saying tariffs would be the "ultimate punishment" on China and increasing the odds of a significant volatility risk event as all roads lead back to trade and tariff.
Still, President Trump says a lot of stuff and this could be little more than political brow beating and pandering to the China hawks.
But while the market is already factoring in a less globalized world during the initial phase of the post-pandemic recovery as economies internalize, rekindling a dormant US-China trade war will likely make any economic improvement exponentially more difficult. And ripping up the trade agreement altogether will trigger a global equity market rout.
US equities closed the week lower, the S&P 500 down a further 2.8% Friday. Tech shares came under pressure: Amazon.com reported a surge in revenue as lockdown measures prompted a rise in online shopping, but also a spike in costs, leaving profits lower than expected. So global markets are trading considerably lower after Amazon highlighted that top-line growth is not translating into top-line profit growth. This is due to higher costs of business in the 'new normal' as both employee and customer health and safety now become huge cash drains.
Questions are going to be asked, as they always are every time we have a 100+ point sell-off since the multi-year outperformance of Facebook, Apple, Amazon, Microsoft and Google led to record-high market leadership concentration. The narrow breadth of the market typically ends up the same way as limited market leadership usually catches down to the underperformers.
Everyone's godfather of stocks, Warren Buffet, indicated he had sold all stakes in US airlines and had not found “anything attractive" in terms of investment opportunities. That’s hardly a bullish rigging endorsement, and that in itself could send equity bulls back to the pen.
In New York, virus-related deaths spiked higher on Saturday and the Governor indicated re-opening the state would not happen until at least 15 May, rekindling fears around secondary outbreaks and suggesting there could further delays in more densely populated centers in the world’s largest economy.
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