• Joel

Risk off end to the week, here's why

Risk off end to the week, here’s why

Risk assets, which started the week strongly amid optimism after the EU agreed on its common fiscal response to the Covid-19 pandemic (called the Recovery Fund), have faltered over the past two days. The S&P 500 (my favourite gauge of risk appetite) is on a two-day losing streak, and other major US and European equity bourses have also been heading lower. Crude oil markets tell a similar story (they are also weaker), while in FX markets, AUD, NZD and CAD all trade subdued and safe haven JPY is the big winner; USDJPY today plunged below the 106.00 level from the high 106s overnight.

Why has risk appetite shifted for the worse in recent days then?

1) Rising US/China tensions

The US this week ordered China to close its Consulate in Houston, Texas due to concerns over intellectual property theft. Trump has threatened that more could be closed across the country (something he is likely to follow through on as he presents himself to the electorate as “taking on China” ahead of the election in November).

China was indignant at this unexpected move by the US and moved to close a similar US office in China. Since then, the war of words between the two nations has picked up and markets are not liking it. I do not expect this to result in a lasting escalation of tensions, however, and given the threat of tariffs is not being wielded (that is the number one thing that markets really hate), the downside caused by this issue ought to be capped for now.

2) Further delay to the next US fiscal stimulus bill, right before the current emergency unemployment insurance benefits programme is set to expire (at the end of this month).

CNN last night reported that the US GOP stimulus bill likely will not be released until Monday as the White House and Senators haggle over jobless benefits and other issues. Markets originally hoped to have the stimulus bill on the floor of Congress to be voted on this Monday. Markets hate delay when it comes to this, so the more this bill gets pushed back, the more markets will fret (and US equities, in particular, will decline).

3) US Covid-19 cases are now consistently topping 70k per day and deaths 1k per day. Looking at the worst-hit states, there has not been a substantial improvement in the situation in Texas, Florida or California and Arizona just extended lockdown restrictions (on gyms, bars, waterparks) indefinitely. 



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