Last week markets continued to move sideways with a slight upward bias. Investors continued to look past the risk that some global events pose and breathed a sigh of relief Friday afternoon as Trump took a somewhat light form of “retaliation” against China.
US-China relations have recently shown signs of deteriorating quickly as the contentious issue regarding Hong Kong have come to the forefront. Last week China approved the proposal for a national security law to be imposed on Hong Kong – this is set to greatly enhance China’s control over Hong Kong and is likely to induce further riots. Trump warned China against these actions, but his retaliatory statements Friday afternoon were vague and not as harsh as most investors were expecting. Hong Kong has enjoyed special trade privileges with the US and now look in danger of losing almost all of them.
Risks to the Current Recovery
The Hong Kong issue could spill over and jeopardise the Phase 1 trade agreement between the US and China, which would also mean that Phase 2 talks never even start.
The murder of George Floyd in Minneapolis at the hands of police have resulted in anger and large protests by the public. Violent riots have erupted with local police unable to contain them and this is becoming a national issue for the US.
There have been some spots in Asia where there are headlines of new infections but these numbers have been small so far and largely ignored. If a second wave of infections were to break out, panic will again set in with healthcare systems and economies globally already struggling.
When you look at the 3 major indices, the picture looks pretty positive. The S&P 500 has broken through its 200-day moving average and closed above it (1st graph), the Dow Jones Industrial Average had a strong week and is nearing its 200-day MA (2nd graph) and the Nasdaq, who’s had the best run out of all of them, is nearing its all-time high (3rd graph).
Graph 1 – S&P 500
Graph 2 – Dow Jones Industrial Average
Graph 3 – Nasdaq
The picture the economic data paints will again be the focus this week as manufacturing and services PMI numbers for May are due to be released, as well as unemployment data. The numbers are set to continue look ugly, although it might look slightly better than April for some countries.
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