What has happened
Whilst the US saw a late rally to end the day in positive territory the same could not be said for European exchanges which suffered as US/China risks ratcheted up. Whilst the source of the late rally wasn’t immediately obvious, investors are still bearing the equity/bond differential in mind which is a strategic support for equity prices.
US/China tensions take centre stage yet again
The main source of market movements came from a Donald Trump interview with Fox Business News. In it he said, in reference to Chinese president Xi, “right now, I don’t want to speak to him” and that the US could “cut off the whole relationship. If we did, what would happen? You’d save $500bn.” The overall interview mirrored this tone and did little to boost risk appetite. Meanwhile the US Senate passed legislation to authorise targeted sanctions against Chinese government officials involved in alleged human rights violations against Muslim ethic minority groups. With only 6 months until the Presidential election this rhetoric is unlikely to calm any time soon barring a perceived capitulation from China which looks increasingly unlikely given the global political pressure that is being levelled in relation to the pandemic outbreak.
UK/EU Trade negotiations wrapping up today
Once this round of trade talks concludes later today there will just be one more round of virtual negotiations before a key high level meeting takes place in June. The mood music so far has been less encouraging with both sides suggesting that there have been changes to pre-agreed terms. David Frost, the UK’s chief negotiator, has also suggested that the EU had “asked far more from the UK than they have from other sovereign countries with whom they have reached free trade agreements”. With Michel Barnier speaking at a press conference today we should hear more from the EU perspective on the talks, but it seems unlikely he will herald a breakthrough given the implied progress so far.
What does Brooks Macdonald think
US/China is likely to continue to be a focus for the market but yesterday’s late rally, continuing into today, suggests that markets are willing to still focus on the longer-term value in equities rather than the near-term noise. As mentioned previously these longer-term metrics such as the differential in yields between equities and bonds tell you little about the near term direction of markets but do drive risk assets over the longer term.