May 25, 2020

Investors Are Wary Of Geopolitical Tension

Investors Are Wary Of Geopolitical Tension

Markets in Asia struggled for direction today and closed mixed on the first trading day of the week. Investors are wary of China’s action in Hong Kong and wonder if this could ignite tensions between the US and China.

Beijing has governed Hong Kong since 1997, and last week China introduced a draft national security law for Hong Kong that bypasses the city’s legislature. Demonstrators took their protests to the streets triggering the worst drop for the Hong Kong index since 2015.

The HSI has now dropped a further 0.50%, while the Shanghai index slid by 0.11%. As an upside, the Japanese market showed its resistance against the ongoing tensions between the US and China. The Japanese Nikkei index closed higher by 1.73%, the KOSPI index also surged by 1.21%.

Last week, Trump anchored tensions between the US and China by agreeing to sell arms to Taiwan. And now, Taiwan president Tsai Ing-wen confirmed in a Facebook post that she stands by the right of self-ruled for the people of Hong Kong.

Taiwan and China have been at odds with each other for decades and Taiwanese sympathy for Hong Kong can only add fuel to the fire.

Investors are likely to remain wary of US-China tension throughout this week. To make matters worse, this ramp-up in tension is particularly poorly timed as the global economy is already struggling under the influence of Coronavirus.

Ostrich investors hope to avoid the prospect of the reversal of the US-China phase one trade deal (which already took months of negotiations to see the daylight).

Despite official statements to the contrary, there is no doubt that China could back out of this agreement if the US continues to interfere with China’s policies in Asia.

There are also rumors that the US is likely to impose new sanctions on China because of its actions in Hong Kong. If this becomes a reality, it is highly likely that global markets will react adversely to this action.

US and UK markets are closed due to a bank holiday, meaning the trading volume over in Europe is immensely thin. In terms of the economic calendar, we are looking forward to the Bank of Canada’s Governor speaking later this evening. Once again, his stance is expected to remain highly dovish.

Earlier today, we received the German Final GDP q/q reading that confirmed their economy shrank by -2.2%. The euro continued its drop against the dollar, and is duelling with the 100 and 50-day simple moving average on a four-hour time frame. If the price drops below these moving averages, it is likely that the price may revisit its previous support at 1.07.

As for precious metals, gold is still trading above the critical level of $1,700. Despite the ongoing regional tensions, investors are hoping that the potential stimulus package from Japan can cause an uptick in the global equity markets.

Japan is considering another stimulus bazooka of $929 billion and if it is approved, it could make the risker assets attractive among central banks. In the last decade or so, investors have learned one thing and that is: never fight central banks. So, a rebound for equities would signal a diminished shine for precious metals now.

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