Markets Ignore Risks… For Now

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China sanctions US officials
Markets on guard
Nikkei -0.39% Dax -0.19%
UST 10Y 0.56
Oil $41
Gold $2033/oz
BTCUSD $11998

Asia and the EU
No Data

North America Open
No Data

Markets were generally quiet on the first trading day of the week with both stocks and currencies flat on the session in Asian and early European trade, but traders were on guard after US-China relations deteriorated further on a fresh set of sanctions bu the Chinese.

China sanctions 11 US officials including Senator Marco Rubio in response to the increasingly hostile stance from the Trump Administration which threatened to ban Tik Tok by September if the company did not sell its US operations to a US buyer. Tik Tok has become the fastest-growing new social media application in the world, but fears over the security of its customer data have rattled US officials.

The economic war of words also spilled over into the geopolitical sphere after a Chinese fighter jet crossed the median line in Taiwan straight tonight. US Secretary of Health and Human Services Alex Azar was in Taiwan this week, ostensibly for COVID consultations, but the Chinese which view Taiwan as runaway province rather than a sovereign state are clearly displeased with a cabinet-level visit by the United States.

Despite the increasing hostilities on both sides the markets continue to ignore the risk of a full-on conflict between the world’s two largest economies with traders viewing the latest skirmishes as nothing more than political saber-rattling. But the conflict has continued to be on a low simmer for quite some time and there is little evidence that either side will be willing to deescalate the tensions, so the economic and political risks may be underpriced.

For now, however, equity traders remain focused on US politics and the prospect of another US stimulus bill. Over the weekend Trump issued a series of executive orders and memoranda that attempted to shove some funds from FEMA into unemployment relief, but almost no expert on policy believed that those plans could be implemented given the constraints on the state’s unemployment budgets. Trump’s other proposal to temporarily eliminate payroll taxes and then perhaps make the move permanent could have massive unintended consequences as it would wreak havoc with both Social Security and Medicare.

Still, markets took the news in stride and while few analysts believe that any Trump’s proposals offer any real solution to the structural unemployment caused by COVID, the general view, for now, is that the President’s latest maneuvers will put pressure on Congress to come up with an actual deal that could be implemented quickly.

For now, the optimists are winning the fight with stock continuing to hover near all-time highs, but if some sort of a deal is not reached soon the markets become very vulnerable to profit-taking as investors lose patience and begin to lock-in recent gains.

Boris Schlossberg
Managing Director

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