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London Open: China faces accentuated challenges from US tension, Hong Kong laws and GDP

Market Analysis - 2 Min Read Stephen Innes | 22 May 2020

The run-up to China's National People's Congress accentuates the challenges China faces in its relationship with the US into November's Presidential election and probably beyond. China will find it challenging to meet GDP growth targets with any certainty if the verbal trade jabs that have increased this week evolve into a full-blown trade war.

Against the backdrop of mounting US-China tensions, more positive news in Europe greenlights EUR-denominated assets. Long EURAUD is attractive in the context of US-China trade risks.

Traders around the world are biding their time while waiting to see details of the new Hong Kong law to gauge how severe the terms are – not to mention the White House’s response to decide whether Hong Kong's special economic status will be affected.

This could be the ultimate game-changer, making this short-term shock a long-term structural change and has undoubtedly knocked risk off its axis this morning. A continued focus on Hong Kong and vagueness in the comment about the need to perfect Hong Kong laws for national security is keeping USDHKD forward points bid.

On trade, the comment on working with the US to implement 'phase one' of the US-China trade deal is an attempt to calm trade fear at home. Markets will likely skip over this.

The 2020 GDP target was abandoned. When the dust clears, this could be interpreted as putting less focus on infrastructure investment. For commodity prices like oil and iron, which is used in rebar, it could be detrimental for AUD in the context of its recent rally.

There was some attention paid to the CNY1 trillion of coronavirus bonds and CNY3.75 trillion of special local government bonds. Size matters in this context as we’ve seen the global market react favorably to policymakers throwing out a significant number. What is vital, however, is where the proceeds are directed. If it’s towards the consumer, it could be a boon for growth and partially offset the possibly less focused view on infrastructure builds.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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