The dollar advanced to a one-month high and risk appetite was subdued on the last day of the month as market participants attempt to sort out the ramifications of renewed virus containment protocols in some US states and escalations in the multi-sided Sino-US conflict.
Hours after the US officially revoked Hong Kong’s special status, Xi signed the new national security measures, which will be written into the city’s law. The UK called it a “grave” step. Japan said it was “regrettable”.
Referencing the latest US measures to restrict exports of sensitive technology to the city, the Chinese foreign ministry said the US “wants to use the so-called sanctions to obstruct China’s legislative process to safeguard national security in Hong Kong”. “Such an attempt stands no chance of succeeding”, spokesman Zhao Lijian remarked. (Take that, Wilbur.)
Read more: US Revokes Hong Kong’s Special Status After Weeks Of Tension Around Security Law
On the bright side, China reported better than expected PMIs for June, with both the manufacturing and non-manufacturing gauges beating on the headline.
“The latest survey data suggest that economic growth accelerated in June thanks to a faster recovery in manufacturing and services, alongside continued strength in construction activity”, Capital Economics said, in a note. “The recovery should remain robust in the coming months as strong infrastructure spending offsets external weakness”.
Still, new export orders remain subdued as external demand is weak, and employment gauges in both manufacturing and services are below 50.
On the virus front, Morgan Stanley notes the obvious, which that the situation in the US “is worsening”. “The reproduction number in the US has remained at 1.17 since last week, while the epidemic doubling time is now 41 days (vs 46 days last week), suggesting that spread is ongoing and accelerating”, the bank says, in a note dated Tuesday. “Our total predicted infections now stand at 3.8M [and] we still note this should be viewed as a best case scenario”.
In a somewhat disconcerting bit, Morgan cautions that if Texas and Florida “do not break their exponential growth in the next 10 days, we would expect the outbreak to become uncontrollable without more aggressive measures”.
Meanwhile, in Australia, citizens living in three dozen suburbs in Melbourne will be put back under stay-at-home orders until July 29. “If the Victorian outbreak cannot be contained or lockdown measures are not followed, we will finish up in a situation [where] we will be locking down every postcode”, premier Daniel Andrews said.
“As H1 draws to a close, equity markets resolutely looked past the negative headlines from the US and abroad on the coronavirus, choosing to focus on some better than expected economic data”, Deutsche Bank wrote Tuesday. “However it’s quite clear that there will be hiccups to come in terms of re-openings”.
For global equities, it was obviously a banner quarter. Coming off one of the most harrowing months in history (March) risk assets staged a remarkable comeback on the strength of unprecedented monetary and fiscal easing.
The MSCI All-Country World index is poised for its best quarter in more than a decade.
It’s probably a safe bet that Q3 won’t be as smooth for stocks as Q2 — or as rough as Q1.
“In short, the month, quarter, and half-year all end with the virus mostly rampant and the economy mostly being propped up by fiscal stimulus we mostly aren’t guaranteed to see extended, as all the while geopolitics getting decidedly uglier”, Rabobank’s Micheal Every remarked on Tuesday. “Yet markets are relying on their own unique take on the economy – and their take-away from central banks”.
