High Tension, Holiday Drift.

US equities drifted aimlessly into the holiday weekend, leaving shares sharply higher on the week, as investors largely dismissed rising tensions between the world’s two largest economies, although not without a pair of relatively minor swoons on Tuesday and Thursday.

Both the S&P and the Nasdaq managed gains Friday, despite highly disconcerting headlines around China’s power grab in Hong Kong, where shares plunged the most in years.

The visual in the bottom pane tells the story for 2020 – there’s big-cap tech, and then there’s everything else.

In the final hour of trading Friday, Commerce added two dozen governmental and commercial organizations to the entity list, citing their alleged involvement in activities described as “contrary to the national security or foreign policy interests” of the US. Those entities are based in China, Hong Kong and the Cayman Islands. Qihoo 360 Technology was among those targeted for “represent[ing] a significant risk of supporting procurement of items for military end-use in China”.

The Commerce department also flagged China’s Ministry of Public Security’s Institute of Forensic Science and Aksu Huafu Textiles as entities engaged in human rights abuses. In all, nine parties were cited as being complicit in violations committed against Uighurs, ethnic Kazakhs, and other members of Muslim minority groups in Xinjiang. This appears to be a kind of sequel to October’s move, when the administration pulled the trigger on Hikvision, among others. The commercial entities blamed for enabling surveillance in the region are CloudWalk Technology, FiberHome Technologies (and a subsidiary), NetPosa (and one of its subsidiaries), SenseNets, Intellifusion and ISVision.

Around the same time, reports indicated the US House will take up legislation to sanction Chinese officials for human rights abuses next Wednesday, setting up a potentially drama-filled week.

All of that comes as the Senate is pressing for sanctions against Beijing for moving to impose mainland national security protocol in Hong Kong. Republicans are also angling to extract some manner of reparations from China for the virus, and Nancy Pelosi says the House is considering legislation to ban Chinese listings on US stock exchanges.

Suddenly, US-China relations are the worst they’ve been under the Trump administration – and that’s really saying something. As discussed here all week, it is just a matter of time before China responds, and you can expect turbulence for markets, even if it doesn’t ultimately derail the bounce in stocks.

Equities currently exhibit extreme polarization. “The market cap of the FAAMG stocks is greater than Emerging Markets”, BofA notes, adding that Microsoft, Apple, Google and Amazon eclipse the Eurozone, while US healthcare’s market cap is greater than that of global banks.

“Clearly there are economic winners and losers of prolonged shutdowns and social distancing”, JPMorgan’s Marko Kolanovic said Wednesday.

“Working remotely, software/cloud, online shopping and socializing, etc. all benefit large technology firms [so] it should not come as a surprise that large tech stocks are near all-time highs”, he went on to write, adding that “this could create (perhaps wrong) perceptions of conflicts of interest when the leading technology firms are influencing policies related to reopening, such as reimagining education, health care, vaccines, contact tracking and tracing”.

Meanwhile, crude logged a fourth consecutive weekly gain, rising 13%, a solid encore after gains of 19%, 25% and 17% in the previous three weeks.

“Money is rushing back into oil on the back of improving supply-demand fundamentals”, PVM’s Stephen Brennock wrote in a Friday note. “Prices have rallied as market players responded positively to OPEC-led cuts and accelerating US shale production shut-ins”.

The latest rig count data out Friday showed a tenth weekly decline.

“Optimism is also building on the demand front as countries lift containment measures [and] US gasoline consumption is more than 30% above last month’s trough”, PVM’s Brennock went on to say.

Earlier this week, reports suggested China’s oil demand is back to pre-virus levels, underscoring an apparent quick economic recovery. And yet, China decided to drop their official GDP target for 2020, a move that draws a bright, red line under the damage done by the virus.

(Morgan Stanley)

Besides the US reopening story, the only narrative that’s likely to matter going forward is the escalation of tensions between Washington and Beijing. The pace of legislation and other official action aimed at turning the screws on China is truly astonishing. Both Democrats and Republicans are keen to press the “tough on China” narrative ahead of the election, and despite his affinity for strongmen and self-described “great relationship” with Xi, Trump’s election platform in 2016 leaned heavily on the same narrative.

Meanwhile, anecdotal (and some not-so-anecdotal) evidence suggests “bored” retail investors are starting to get adventurous the longer they’re confined to their home offices.

“Darting in and out of stock options, dabbling in complicated exchange-traded funds, devouring trading how-to books by the dozen — all have become tools in the self-directed portfolio playbook”, Bloomberg’s Sarah Ponczek writes, in an entertaining article published Friday. “Locked down and socially distant with lots of time and (apparently) money to spare, they’re leveraging zero-percent brokerage fees in new and surprising ways”, she adds.

One example: More than 13% of options volume is now accounted for by trades of just one contract.


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