Monday’s Bullseye

One of the key risks facing investors is if China passes a hugely controversial national security law as Beijing tightens its grip on Hong Kong. The other worries include the still rising covid-19 cases in some of the world’s most populated nations and the weakness persisting in jobs data in the US.

The week ahead should be an interesting one for market participants. There is a lot going on from a geopolitical front, so the week’s economic data releases will probably not be too important in the grand scheme of things. Nonetheless, there will be some key macro numbers to watch later in the week, including the closely watched US weekly jobless claims data. One of the key risks facing investors is if China passes a hugely controversial national security law as Beijing tightens its grip on Hong Kong. The other worries include the still rising covid-19 cases in some of the world’s most populated nations and the weakness persisting in jobs data in the US.
Summary of this week: US vs. China vs. Hong Kong
Already worried about coronavirus and its impact on the global economy and jobs, the last thing investors needed was further deterioration in US-China relations. Yet, that’s exactly what has happened. Trump has directly attacked China’s leader Xi for the nation’s handling of Covid-19, while Beijing’s plan to impose a new security law in Hong Kong has further fuelled tensions there, with the US President saying Washington would react "very strongly”. The Hang Seng endured one of its biggest daily falls on Friday, and stocks linked to Hong Kong elsewhere also had a bad day.
As result, stocks fell sharply on Friday before bouncing back when Wall Street opened for trading. Ahead of a long weekend holiday in the UK and US, some investors will not be comfortable holding onto their long equity positions because of the risk the markets could gap lower at the open next week. It was therefore possible we would see renewed weakness later on in the day (this report was written just after Wall Street opened).
This past week has actually been quite choppy. Stock indices rallied sharply on Monday then traded side-ways for the rest of the week. Once again, the Nasdaq led the advance. The biggest faller was Hong Kong’s Hang Seng. China’s markets fell too after the government decided to abandon publishing a GDP target for this year, and after the escalation in war of words between Washington and Beijing.  In FX, the Dollar index started lower then rose again as the long weekend approached as risk appetite turned sour. Likewise, after a big upsurge Monday and some follow through in midweek, the rally for the EUR/USD then petered out. Similarly, the cable couldn’t build on Monday’s gains amid continuing worries over the health of the UK economy and dovish remarks from BoE’s Governor.
Looking ahead to the new week
With the list of worries growing, investors may think twice about buying risk assets next week ahead given the potential for some more sentiment-sapping geopolitical news to come out over the coming days.
Hong Kong
Clearly, the situation in Hong Kong needs to be followed closely, as it could further stoke tensions in the region and also between China and the US. China is expected to pass a law that will ban sedition, secession and subversion of the central government in Beijing. This is expected to cause further violent anti-government unrest, as we saw repeatedly last year.
Asian-focused markets could fall further out of favour as a result next week, with the potential risk-off tone likely to undermine the Aussie dollar’s rally too.
Covid-19 infections are meanwhile still growing rapidly around some parts of the world, including Brazil, India and Russia, which could unfortunately mean more human and economic costs. Thursday’s US jobless data is a snapshot of the extent of the economic damage this disease has caused. Watch for potential spikes in new cases and death rates given the size of the population in these countries. Hopefully, it won’t be as bad, but it is difficult to adhere to social distancing measures in countries with huge populations, especially poorer regions in India and Brazil, and similar countries elsewhere.
Key data
There are only a handful of potentially market-moving data scheduled for next week, mostly from the US. These include:
  • CB Consumer Confidence and New Home Sales (Tuesday)
  • GDP, Jobless Claims, and Pending Home Sales (Thursday)
  • Personal Spending, Chicago PMI and a speech by Fed’s Powell (Friday)
We will also have speeches by BOC’s Poloz (Tuesday) and ECB’s Lagarde (Wednesday), as well as data dumps from Japan and Eurozone (Friday). See our economic calendar for more.
Given the sheer number of US macro pointers scheduled for the week, the dollar could be in for some volatility around the data releases. GDP is backword-looking so the focus will likely be on jobless claims again, as well as the housing market and consumer sentiment data. Although new unemployment claims fell again last week, they still totalled 2.43 million which means the lockdown tally has now reached a mind boggling 38.6 million. Continuing claims totalled a very high 25.1m, an increase of 2.52m from the previous week, while the 4-week moving average jumped by 2.3m to stand at just above 22m. These metrics suggest unemployment is persisting and is a worry to those who anticipate a quicker, V-shaped, recovery. If the upcoming release show a similar picture, then that would be a worry. Equity market bulls will be hoping to see a sharp recovery.
Bleak outlook
So, against the above fundamental backdrop, there is a risk the wider markets outside of Hong Kong and China could fall in the week ahead, despite all the efforts of major central banks and governments to provide support by addressing the supply side. Central banks have used up nearly all available monetary tools at their disposals and have very little ammunition left, despite the Fed and co suggesting otherwise. Regardless, the efficacy of further monetary stimulus is such that it will have diminishing impact on the economy and markets. The vast QE packages already in place as well zero interest rates have just helped to fuel a bubble in stocks, especially in the US. Without a corresponding economic recovery, US investors will find it difficult to justify buying equities at these elevated levels.