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London Open: Increasingly gnarly US-China trade relations challenge bullish narrative around economic re-openings

Market Analysis / 3 Min Read
Stephen Innes / 26 May 2020

Increasingly gnarly US-China trade relations are challenging the bullish narrative around economies re-opening amid limited evidence of the second wave of new coronavirus infections.

China pushed back against the US's latest escalation that involves the blacklisting of 33 of its companies. In Hong Kong, reports suggest that the US will only respond to proposals to "improve" national security legislation after a May 28 vote at the National People's Congress. 

A higher fix for USDCNY (7.1209 on Monday and another new post-2010 high today 7.1293 ) could put pressure on EM FX and China-sensitive G10 currencies. TWD is vulnerable in a geopolitical context after the word "peaceful" was omitted from Chinese Premier Li's descriptions of unification with Taiwan in his NPC remarks last week.

If the currency becomes an economic policy of choice for the PBoC, the risk of higher US tariffs will loom exponentially large into the US presidential election in November. 

But today it's the grand re-opening that matters and with the S&P 500 within earshot of the psychologically fundamental 3000 marks, if traders can put some headroom above that level the view that this rally is only a bounce from oversold will most certainly give way to the wall of money argument, triggering another considerable round of bear market capitulation.


Markets in Singapore are open again today to great news. With a smaller-than-expected contraction in Singapore's GDP for Q1, the unchanged policy stance from the central bank and a fourth coronavirus stimulus package set to be announced later this afternoon, things are looking up indeed.

Singapore is among the world's most open economies and is viewed as a bellwether on the economic front. And while the market was positioning for more pain, the GDP contraction was much less than expected. That will be received quite favorably in the global context since Singapore's economy is only now emerging from lockdown status. Before we race too far ahead of the economic reality, the accommodation and food services sector contracted by 23.8 percent year-on-year, a significant pullback from the 2.5 percent growth in the preceding quarter; under the hood, the data implies soft end-demand. After all, getting factories up and running is the natural part – it's quite another getting consumer demand going amid weakening labor markets.

The Euro 

In Europe, the Franco-German EUR500 bn coronavirus recovery fund proposal helped EUR-denominated assets last week. Nonetheless, a counter-proposal from the EU's so-called 'frugal four' (Austria, Denmark, the Netherlands and Sweden) rejects the idea of grants.

BTP-Bund spreads (10y) are approaching 200bp, having traded at 207bp on Monday, suggesting fixed-income investors do not see the group of four's opposition as being material.


WTI could move through +$35 this week with the help of a US inventory draw, but I think it’s wise to exercise some caution by reducing risk. Things are bound to get incredibly bumpy as the bullish-for-oil re-opening narrative will continue to get challenged by heightened US-Sino tensions. And with the market cratered with Covid-19 pot-holes left, right and center – as every central banker in the world will be willing to tell you –the market will be prone to lay off risk on rallies as traders try to equate prices against the backdrop of a weak real economy.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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