A new, and potentially serious escalation on the geopolitical front put risk assets on the back foot early Wednesday in the US, although stocks eventually recovered to close higher.
Perhaps the forced closure of China’s Houston consulate will be the post-pandemic equity rally’s first real test. Perhaps not. “We’ll see what happens”, as Donald Trump would say.
It’s not good news, that’s for sure. “This is only the latest escalation in a series that will end up in a crash for relations, for Hong Kong and for the yuan unless something changes”, Rabobank’s Michael Every said. “The markets will worry for all of five minutes and then resume rallying — right up until they realize the China-US dynamic blows everything up eventually”.
Read more: In ‘Unprecedented Escalation,’ Trump Evicts China From Houston Consulate
Each incremental escalation takes Sino-US tensions further into “Cold War 2.0” territory. Ahead of the election, both parties understand that “blame China” is a rallying cry that resonates with voters, especially in the wake of the pandemic, which Trump still insists on calling the “China Virus”.
If there’s any issue that has broad, bipartisan support, it’s this one. Both parties advocate an aggressive approach towards Beijing, whether that means sanctions for human rights abuses, various countermeasures aimed at punishing Xi for the new national security law in Hong Kong, steps to restrict capital flows to China, or policies designed to protect national security from threats (some real, some imagined) emanating from Beijing’s tech ambitions.
The Hang Seng China Enterprises index sank rapidly into the close in Hong Kong as the consulate news triggered a sharp, late slide in city shares.
Hong Kong is dealing with a fairly aggressive new coronavirus outbreak and reported a new record for daily cases Wednesday.
“Hong Kong’s epidemic is at the most severe moment”, warned Sophia Chan, food and health secretary. “I urge all citizens to stay in their homes and stop unnecessary outings”.
Local markets have held up reasonably well all things considered, and will get a lift from Ant Group’s dual listing. But Wednesday served as a rather stark reminder that all it takes is one adverse headline around Sino-US relations to flip risk sentiment.
I dare say fair trade is now pretty far down the list in terms of what US lawmakers and Trump administration officials are focused on vis-à-vis China.
The trade deal is “toast” — everyone knows that. Yes, China is buying some farm goods, but it matters little. “I don’t think about it now”, Trump told reporters earlier this month, lamenting the impossibility of advancing trade talks into “phase two”.
China is hitting back at US escalations. Recent moves include sanctions on Ted Cruz, Marco Rubio, and Lockheed Martin. Beijing will surely respond to the Houston escalation.
The Chinese economy rebounded in Q2 and reports on Wednesday indicated the PBoC sees no urgent need to step up monetary easing. Between that and Trump’s poor poll numbers, Xi may feel he has a strategic advantage.
On the other hand, Beijing may simply prefer to bide its time and see how the election plays out. Although many analysts doubt a Biden administration would, in fact, materially deescalate the situation, the tactics would likely be different, which would change the calculus.
In any event, we now have a material escalation, and an excuse for anyone who was thinking about checking out of equities after getting “even” for 2020 to do so ahead of August, a month defined by unfavorable seasonality and illiquidity. Remember, last August was not smooth sailing.
“China was always going to be a campaign issue for Republicans and Democrats and early indications were that neither side wanted to appear soft”, Bloomberg’s Eddie van der Walt wrote Wednesday. “But the timing couldn’t be worse for risk assets, currently only propped up by central bank stimulus”.
As Rabobank’s Every alluded to in the quote excerpted above, investors may ignore this in the near-term. His advice: “Enjoy the ride and don’t believe in it for a moment”.
“I’m massively bearish in the long-term”, Every added, on the off chance anyone who receives his highly entertaining daily missives hadn’t surmised as much.
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Meanwhile, an international team of astrophysicists announced that an asteroid comparable to the Chicxulub impactor was found to be on a direct path to hit earth in the coming months. After suffering severe losses in the first five minutes of trading, equity markets staged a rebound and ended higher, looking past the impact to a V-shaped recovery aided by an expected massive infusion of liquidity by the world’s central banks.