US-China Tensions – How Is It Affecting Markets?
US-China Tensions - How Is It Affecting Markets?
What is driving markets amidst the US-China tensions and Covid-19 pandemic? How is US President Donald Trump’s railing against Twitter affecting tech stocks?
Find out as Michelle Martin speaks with Jeffrey Halley, Senior Market Analyst at OANDA on Money and Me.
Michelle Martin: On the US-China tensions, there is a growing list of public disagreements including debates over the origin of Covid-19, new security laws in Hong Kong, China's treatment of Uyghurs, and trade & technology. The announcement of the press conference US President Donald Trump is going to hold to address some of these issues triggered a sell-off on Wall Street overnight. Investors have really overlooked US-China disagreements for the last couple of months. Do you expect these tensions to once again become a main part of the stock market narrative?
Jeffrey Halley: I really believe it will all be down to the detail of what repercussions China will face from the United States with regard to this Hong Kong security law. I don't think the timing is very good. It seems strange to me that they would come down so hard on this particular point when the world's economy is so weak. If we're talking [about] new tariffs or trade barriers penalised in China, then this could take the wind out of the sails. But we have to realise that the actual rally and asset markets we've seen are mostly being powered by unconventional monetary policy. I think if anything, it will only cause temporary dips in the market. That is the underlying theme at the moment.
MM: Do you see a V[-shape] or a barbell as the main themes that are driving markets in the months ahead?
JH: We are definitely not going to see a V-shaped recovery. [I believe what we’ll be] seeing is a U-shape recovery with a pretty wide bottom. Some countries in some parts of the world will recover faster than others. Even after Covid-19 is brought under control, we're still quite some time away from [finding] a vaccine. Air and international travel will not be returning to what we are used to over the past few decades anytime in the next 12 to 18 months and that is going to crimp economic growth. So, I'm expecting us to bump-bounce along the bottom for the next few months before we start seeing a gentle recovery later in the year.
If anything I think that could upset this [U-shape recovery] will be that someone magically comes up with a Covid-19 vaccine in the next few months and we'll be back to where we started by 2021. I think the unconventional monetary policy that we've seen in such huge amounts around the world will continue to support equity markets in particular, and oil to a lesser extent, despite the fact that given what we see on the ground in our everyday lives this seems quite contrary to real life.
MM: Looking at tech stocks, specifically social media companies. US President Donald Trump has been railing against Twitter this week ever since Twitter applied fact check messages to two of his tweets. Overnight, he signed an executive order that could open the door to new litigation against social media platforms. Currently, Twitter, Facebook and other [social media platforms] are protected from lawsuits over what people post but that could change.
Now, putting aside the fact that the US President appears to be using the law to punish a company, do you think his actions will significantly hurt Twitter?
JH: The short answer there is no, because I think that the executive order will be challenged in court and I think its legality will be marginal. In fact, Donald Trump has even said that himself. So, I think he is trying to send a message here rather than actually trying to change the nature of social media. I believe that we may see a little bit of short-term pressure on [social media platforms], but the damage won't be long-lasting. That would require a change of law to be enacted through the house of the Congress and the president himself, and I just don't see that making its way through at this stage. Therefore, I would say that the effect will be transitory and temporary.
MM: But we did see Twitter shares falling nearly 4.5% overnight.
JH: Yeah, I think we have to realise that a lot of the S&P 500 and NASDAQ gains have been led by Big Tech. So, it might be because there has been so much money pushed into that trade over the last couple of months. It doesn't take a lot for people to suddenly run for the door. I don't think that investors these days have very deep pockets or they have no inclination to ride losses. Investors are happy to get on the wave riding higher, but they're not really going to tolerate much in the way of all that. Thus, the more nervous investors are going to cut those positions very quickly and that's what causes these big drops. I think more in today rather than a structural change in the outlook for the Big Tech, this [could be due to] more fast money running in and out of positioning.
MM: With US-China tensions coming to the forefront again, overall, do you think that tech stocks are going to falter a little? They seem to be the most exposed to this issue.
JH: I would actually think that some other sectors might be more exposed. Most of these Big Tech stocks don't do a lot of business inside China itself because of the great firewall of China. So you don't see Facebook and Twitter doing a lot of business inside of China, [instead], they do a lot of business with Chinese companies outside of China. I would say that manufacturers such as Caterpillar, discretionary companies that export to China like Harley Davidson, or Audi in Germany, would be more exposed to a trade war than the Big Tech itself.
Certainly, I think there are going to be some issues if they continue to squeeze Huawei and the selling of components to the United States, but I think we've seen [companies such as] Taiwanese manufacturers actually move their manufacturing out of China and reshore back to the US, Indonesia or other countries.
MM: Singapore is facing its worst economic contraction since its independence. The government announced that the economy could shrink as much as 7% this year. It appears to be tackling the problem head-on with a 33 billion dollar fourth budget, which it says will create 95 thousand jobs and training places. Do you see this assistance trickling through to support Singapore companies and shares?
JH: I don't think that this is going to [have an] impact on Singapore shares directly and initially. I think it's actually the external factors around the world that are driving sentiments in the Singapore market rather than the government stimulus measures, which are really there to keep the lights on while Singapore weather with the pandemic.
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This interview was broadcasted on MONEY FM 89.3 on 29 May 2020.
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