Daily Market Comment – Geopolitical tensions and virus spike dampen sentiment, but not much


Raffi Boyadjian, XM Investment Research Desk
  • Rising regional tensions and a worrying increase in coronavirus cases weigh on risk assets
  • But safe havens barely supported as growth optimism and drug hopes keep risk appetite alive
  • Yen and gold slip, aussie bounces back from lows as stocks turn green

Geopolitical tensions on the rise

Clashes along the border between India and China as well as fresh provocations by North Korea over the last 24 hours raised fears of a serious flare up in regional conflicts amid a global pandemic. Tensions have been steadily building up on the India-China border, while North Korean anger at the distribution of propaganda leaflets by the South has been intensifying over the past week. But the latest escalations may signal a turning point for relations between the regional powers.

Yet markets don’t appear too worried even though the latest developments are potentially very dangerous. A bigger concern for investors right now is the troubling signs of a second wave of COVID-19 infections hitting various parts of the world. Beijing has tightened its lockdown after 106 positive cases were uncovered on Tuesday. New virus cases have also been rising in the Middle East and the United States, although it’s arguable whether America really is experiencing a second spike as the first wave probably never receded.

Another dampener on the market mood on Tuesday was the Congressional hearing by Fed Chairman Jerome Powell. The Fed chief played down the prospect of aggressive corporate bond purchases, the idea of which had cheered markets earlier in the day. Powell also warned of “significant uncertainty” about the economic recovery in the US, casting doubt over the strength of recent data.

Recovery and drug hopes maintain bullish bias for stocks

All this put a cap on Wall Street yesterday, though the S&P 500 still managed to close above the 3,100 level. Shares in Asia reversed earlier losses to close mostly higher and European and US stock futures pointed to extended gains today.

Amidst the growing risks of a second wave and brewing geopolitical tensions, markets continue to set their sights on a strong recovery as well as on a vaccine or treatment being found soon for the virus. Reports that a cheap steroid significantly reduces the death rate among seriously ill COVID-19 patients and a vaccine being trialled by AstraZeneca could be ready by October reinforced those expectations.

Risk appetite was also supported by a bigger-than-expected jump in US retail sales in May, underscoring hopes of a V-shaped recovery. Retail sales surged by a record 17.7% on a monthly basis as the US economy slowly reopened in May. Although question marks remain as to whether such a pace of recovery is sustainable given that the pandemic is unlikely to end anytime this year, the flood of stimulus is making it difficult for investors to ditch their optimistic views.

Yen and gold edge lower, aussie posts uninspiring rebound

In the currency and commodity markets, the prevailing optimism was evident from the softer yen and weaker gold prices. A face-to-face meeting by the US Secretary of State Mike Pompeo and a senior Chinese diplomat later today in Hawaii may be helping to allay some of the anxiety arising from the other geopolitical frictions. Expectations that the meeting will resolve any of the recent disputes between the US and China are low but the fact that the two sides are talking is seen as positive.

Nevertheless, the US dollar and the Swiss franc were mixed on Tuesday and most pairs appeared to be consolidating. Even the Australian dollar, which is today’s biggest gainer (+0.3%), is struggling to regain positive momentum despite not being at much risk of a major downside correction. This could perhaps be the start of a new sideways range as investors await fresh clues on the strength of the recovery and whether a second virus wave is really in progress.