London Open: Potential flashpoints await investors at every turn this week
Market Analysis - 3 Min Read Stephen Innes | 01 Jun 2020
Landmines lay in wait, but do they matter?
Political perturbation amid widespread US unrest and Hong Kong protests, central bank meetings (RBA, BoC, ECB), PMIs, an OPEC+ meeting, and the US employment report for May are potential flashpoints for investors this week. And, if nothing else, the magnitude of recent moves could force investors' hands ahead of these potential market landmines.
But does any of this matter with the Federal Reserve – supported implicitly by the US Treasury – committed to being backstop to virtually every single bit of credit in the economy?
In Asia, stock market risk is trading most favorably this morning. Reopening optimism reigns supreme as the markets have temporarily shelved the trade war escalation playbooks in favor of the bullish for market reopening scripts and as economic data throughout the region is holding up well.
US President Trump's press conference last Friday was long on criticism of China but short on action. While the White House is fire-fighting on the domestic front, it’s still a bit early to gauge the impact on the November US presidential election – but it’s not going to be positive if the rabble-rousers have their say. With political firestorms igniting across the US, the President may reorient his focus to the old faithful foreign policy and China correctly, which suggests the selloff in USDCNH from last week's highs is an opportunity to buy.
White House aides are split over how US President Trump should approach escalating civil unrest in the US, Politico reports. The President's Chief of Staff Mark Meadows is said to favor a formal address to the nation to highlight Republican support for law and order. By contrast, the President's senior advisor and son-in-law Jared Kushner, along with other aides, caution that such an approach could alienate key voters ahead of the November presidential election. Presumptive Democratic nominee Joe Biden leads Trump by an average of nine points based on four polls (YouGov, ABC/Washington Post) taken over the past week, according to FiveThirtyEight.
The US announced on May 29 that it would begin the process of eliminating special treatment to Hong Kong. Most economists think the direct impact of revoking Hong Kong's special customs status and more export controls will likely be limited as Hong Kong will remain a free port and its exports to the US account for less than 0.1% of GDP. This assumes that the free exchange between the US dollar and HKD will continue. Market confidence could be affected by national security legislation amid domestic uncertainties and US reaction in the short-term. But over the medium term, the net impact will depend on whether China's control over Hong Kong tightens and possibly triggers even more civil unrest.
The Bank of Thailand (BoT) has expressed concern about THB strength. This is not unusual and tends to surface during periods of THB outperformance. After IDR, THB was the second best-performing currency in EM Asia during May in spot and total-return terms. Like the rest of the region, a stronger currency is not welcome in Thailand in the context of weak exports (a big hit to tourism too, in Thailand's case) and low inflation.
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