US-China trade war bubbles to surface

By Chris Harmse Time of article published May 18, 2020

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JOHANNESBURG - Geopolitical risks and devastating US data drives uncertainty in markets.

Just as everyone thought that the Covid-19 pandemic is the main risk for financial markets and global economic recession, geopolitical turmoil returned to the front.

It seems that the US-China trade war for now was forgotten and of the past. Suddenly it re-appears to be well and alive as President Donald Trump argues that the Chinese failure to contain the Covid-19 virus had jeopardised the January trade deal.

Trump announced that he does not want to speak to the Chinese President Xi Jinping now and that he is even thinking about cutting off the whole trade relationship.

This new development as well as devastating US retail sales that completely collapsed in April to -16.2percent, a further 3 million new jobless claims and the manufacturing PMI dropping to 41.5, the lowest since February 1949, brought fear to investors last week.

Equity markets contracted for most of last week as analysts now start to fear a strong downward correction in share and bond markets in the short run. In the US, the S&P 500 index lost almost 4percent during the first three days last week and remained under pressure at the opening on Friday.

More fears of a typical W-formation starts to emerge. Prospects are for volatile and risky movements over the next few months till certainty over the end of the global lockdown and the effects of the huge stimulation packages start to show. Once again emerging markets felt these uncertainties strongly as their bond rates and currencies paid the toll.

Domestically the rand exchange rate and equities on the JSE not only moved in tangent with the global markets, but also remain nervous on the lack of certainty on the handling of the government of the lifting of the lockdown requirements.

The weaker rand and increases in the prices for gold and most other metals helped the JSE to rather move sideways over the week. The all-share index ended the week on 49628 points, down by 2.7percent. Financial, banking and property shares had a terrible week. The Fin15 index tumbled 10.8percent and is now 42percent down for the year to date. Listed property is now 50percent lower since the beginning of this year.

Foreigners were net sellers of South African shares and bonds as emerging markets experienced capital flight to less risky assets and the dollar and gold as safe havens. Gold bullion had already increased by 19percent over the past six months, trading on Friday at $1748 per ounce, up by 35percent over the last year.

The rand, in reaction to the foreign sell-off of equities and bonds ended the week R18.55 to the dollar or 1.2percent weaker than the previous Friday (R18.33). On the capital market the R186 government bond also lost some ground trading on 8.1percent on Friday or 1.7percent weaker than the previous week. But the bond market is still 2.47percentage points lower than the 10.48percent level on March 6, the day after Moody’s downgraded South Africa finally to junk status.

This week attention will be on the interest rate decision of the Monetary Policy Committee on Thursday. Consensus is for another cut.

Dr Chris Harmse: Economist and chief investment officer at Rebalance Fund Managers.


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