Dubai: As investors remain wary of a surge in new COVID-19 infections, worsening trade relations between the world’s top two economies is seen further stoking panic among market participants.
“Markets have rallied sharply on unrelenting policy stimulus, but COVID-19 has yet to be defeated,” analysts at Europe-based asset manager Pictet Asset Management wrote. “Fears of a second wave and mounting political risks argue for investor caution.”
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“On balance, we do not believe that markets can rally much further in the months ahead,” the analysts added. “We therefore keep our asset allocation neutral across equities, bonds and cash.”
Markets lose rally steam
Markets have been losing much of the momentum built over the past weeks as the US, which is battling a renewed surge in COVID-19 cases, said it was looking to impose a fresh round of sanctions on 11 individuals, including Hong Kong leader Carrie Lam, which flared up prevailing tensions with China.
Washington has been critical of Beijing’s recent decision to pass a sweeping national security law limiting Hong Kong’s autonomy and banning literature critical of the Chinese Communist Party. They are also struggling to mend trade relations, with intellectual property theft proving to be a sticking point.
The reason why these developments were not received well by investors globally, particularly Asia, is because the news followed a day after US President Donald Trump executively banned Chinese tech giant Tencent’s messaging service WeChat and ByteDance’s popular short-video-sharing app TikTok.
Hong Kong stocks plunge
The move against WeChat sent shares of its owner Tencent plunging as much as 10 per cent in Hong Kong. Although they pared back some of those losses, the stock ended up losing over $45 billion in stock value in a single day. Hong Kong’s benchmark Hang Seng index fell 1.6 per cent.
The VIX, a measure of US stock market volatility, rose more than 5 per cent Friday, though the index remains far below its recent highs in March. Analysts have been cautioning how the action is a major step up of the tensions between the US and China.
Analysts further warned how this can force big Chinese names like Alibaba and Baidu to delist from US exchanges by 2022, fueling further panic among investors. As the battle over China’s tech gathers steam, the threat of steep market declines loomed just as investors hoped for an imminent COVID-19 vaccine.
Europe in better shape
“Whether the vantage point is the economy, the political landscape or COVID-19, Europe appears to be in better shape than the US,” the analysts at Pictet wrote.
“The dollar’s sharp reversal over recent weeks has prompted us to close our relative overweight on the euro and reduce our stance to neutral. But that’s a tactical trade. Longer term, we remain bearish on the greenback.”
A key overhanging macro threat is the number of new coronavirus infections surging in France, Brazil, India and parts of Australia. Although the severity of the outbreak has reduced worldwide, countries being forced to initiate another round of lockdowns can drag out an economic rebound even further.