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Equity Markets Look Increasingly Fragile as US-China Tensions Escalate

Equity Markets Look Increasingly Fragile as US-China Tensions Escalate

Nick Cawley, Senior Strategist
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FTSE, DAX and S&P Price, News and Analysis:

  • New law bans secession, subversion and terrorism.
  • US Secretary of State Mike Pompeo warns HK’s preferential status at risk.
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Risk Markets Need to Take Heed of Political Tensions

Global equity markets continue to extend their sharp rebounds from their late-March multi-year lows, favoring central bank liquidity over increasing global political risks. The S&P 500 has recouped nearly 70% of its recent losses, with the German DAX 30 close behind, while the FTSE 100 has returned over 50% in the last two months. Furthermore, the NASDAQ 100 is close to regaining all of its recent losses, driven by market heavyweights, Microsoft, Apple, Amazon and Alphabet. While central bank largesse continues, markets are content to ignore growing political tension between the world’s two superpowers, the US and China.

S&P 500: High 3,391 (Feb 20) – Low 2,184 (March 23) – Currently 3,046.

DAX 30: High 13,830 (Feb 20) – Low 7,971 (March 19) – Currently 11,747.

FTSE 100: High 7,690 (Jan 20) – Low 4,776 (March 230 – Currently 6,185.

The US and China have been at loggerheads for years, with President Trump accusing China of ongoing unfair trade practices, sparking a rift between the two countries. The US has also blamed China for the spread of the COVID-19 virus, straining relations further. These relations will be now be soured to a greater extent after China passed a new security law for Hong Kong, undermining the island’s authority. US Secretary of State Mike Pompeo, has already said that this ruling would mean that Hong Kong is ‘no longer autonomous from China’ and that the island’s special trade status under US law would be under scrutiny. This would damage Hong Kong’s position as a global financial hub and create serious economic implications for China.

While equity and other risk markets are currently content to dance to the noise of the central bank’s printing presses, recent economic data has laid bare the effects that the COVID-19 lockdown has had on economies around the globe. Equity valuations are becoming increasingly stretched and the likelihood of another market downturn cannot be discounted as tensions between the US and China increase. Any further economic sanctions between the two will weigh heavily on market sentiment and while current liquidity conditions may underpin equity markets at or around current levels, further upside is becoming increasingly difficult to justify.

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What is your view on Global Risk Markets – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.