MARKETS COOL AS US/CHINA TENSIONS HEAT UP

MARKETS COOL AS US/CHINA TENSIONS HEAT UP

This week the cold war between the US and China got a few degrees hotter. The imposition of new security laws on Hong Kong by China has eroded the territory’s independence and looks set to end the ‘one country, two systems’ approach. It is a sad day for Hong Kong but perhaps inevitable that a China that is looking establish hegemony over South East Asia wouldn’t allow a quasi-independent state inside its own borders. The question now is what happens to Taiwan. China has long claimed ownership of its neighbour but Taiwan’s security has been ensured by the US Pacific Fleet. China might be willing to put that to the test if the isolationist President Trump secures a second term in November.

Elsewhere many countries have shown solidarity with Hong Kong by offering its citizens visas to relocate. The UK, which has historic ties to the island, offered visas to 300,000 Hong Kong residents. The United States has threated to end the exemption of Hong Kong from its broader restrictions on China and cancelled the visas of many Chinese students.

US: S&P 500 REGAINS 3,000 POINTS AS JOBLESS CLAIMS HIT 40 MILLION

The S&P 500 climbed back above the psychologically important level of 3,000 points this week, as US equity markets continue to be driven by hopes of a swift recovery. The easing of the lockdown has seen some leading economic indicators

begin to recover. For example, US consumer confidence has begun to pick up after hitting a six-year low in April.

Despite the symbolic reopening of the New York Stock Exchange trading floor, it is far from back to normal in the US. The number of coronavirus cases continues to grow in many states and unemployment has continued to increase at an eye watering rate. This week saw a further 2.1 million new unemployment claims taking the total number of people to have lost their jobs to over 40 million. May also saw the number of bankruptcies of large firms at their highest since 2009. Meanwhile fresh tensions with China over Hong Kong’s independence have added a new source of uncertainty as the US seeks to begin the process of recovery.

EUROPE: MARKETS WELCOME EU PLAN FOR STIMULUS PACKAGE

Financial markets have welcomed the €750bn coronavirus support package unveiled by the European Commission. The announcement was far bigger than the €500bn that had been expected and helped European equity markets to solid

gains this week. The Euro STOXX Index was up 3.9 per cent by the end of Thursday, helped by strong gains in the banking sector. Bond markets have also been reassured by the plan. The spread on 10-year Italian government bonds over 10-year German Bunds dropped to 1.85 percentage points, the lowest level since March. Yields on Spanish and Portuguese government debt also fell to their lowest since March.

The Commission’s plan includes a €500bn recovery fund which will hand out grants and €250bn of borrowing available to member states. The plan includes proposals for new EU-wide taxes and levies to pay for the new borrowing. Markets may have been reassured by the proposals, but they face objections from several countries opposed to using grants rather than loans, as well as disagreement over where the money goes.

EQUITIES: AIRLINES BOOSTED BY HOPES THAT SUMMER HASN’T BEEN CANCELLED

Airline stocks have experienced more than a little turbulence this year. Air travel has been one of the worst affected businesses as countrywide lockdowns and

restrictions on international travel saw the number of international passenger flights fall by around 90 per cent from their usual levels. Airline and other travel stocks have been among the worst performing sectors in 2020. Between 1st January and 22nd May FTSE All Share Travel and Leisure stocks fell by 40 per cent.

However, this week saw a sharp reversal on news that travel restrictions are being relaxed and the same index was up by 12 per cent to the close of trading yesterday. Several airlines have resumed ticket sales in time for the crucial summer holiday period. Portugal had already declared it will be open for international travel and this week Spain announced that from 1st July it would no longer require international travellers to enter quarantine. Italy and Greece also intend to open for tourists from within the EU in June.