De­te­ri­o­rat­ing US-China re­la­tions is not re­flected in mar­kets

Business a.m. - - FINANCE & INVESTMENT -

TEN­SIONS BE TWEEN THE world’s two largest economies are on the rise. Af­ter or­der­ing the shut­down of China’s con­sulate in Hous­ton and claim­ing two Chi­nese hack­ers tar­geted US com­pa­nies work­ing on the virus and steal­ing in­for­ma­tion, we are yet to see the Chi­nese re­sponse. US-China re­la­tions have al­ready been wors­en­ing since the be­gin­ning of the year on sev­eral fronts, in­clud­ing the han­dling of the coro­n­avirus, cut­ting Huawei’s op­er­a­tion in the US and abroad, re­vok­ing Hong Kong’s spe­cial sta­tus af­ter China im­posed a new na­tional se­cu­rity law on the city and sev­eral other is­sues. How­ever, the clo­sure of a con­sulate is un­prece­dented and could take the cold war onto a new level.

The mar­ket re­ac­tion to the lat­est de­vel­op­ments has been muted. US stocks man­aged to end Wednesday’s ses­sion near their multi-month highs, the dol­lar con­tin­ued its down­ward tra­jec­tory against its ma­jor peers and the dam­age was lim­ited to Chi­nese equities and the Yuan to some ex­tent – which is trad­ing back above seven against the dol­lar, at the time of writ­ing. Hopes for another round of US stim­u­lus and bet­ter than ex­pected earn­ings from the big tech firms is keep­ing the rally alive de­spite val­u­a­tions be­com­ing ex­tremely over­stretched. But if wors­en­ing US-China trade re­la­tions lead to re-im­pos­ing of trade tar­iffs, then it’s likely to mark the short term top in equities.

Bet­ter than an­tic­i­pated earn­ings from the likes of Tesla and Mi­crosoft are not the true rea­son why stocks are at cur­rent lev­els. It is be­cause mon­e­tary and fis­cal in­ter­ven­tions have left few op­tions for in­vestors to park their money. Con­sider that high in­vest­ment grade bond yields dipped below 2% for the first time ever on Wednesday and that US 10year Trea­suries are yield­ing 0.6%, which when sub­tract­ing in­fla­tion, will leave in­vestors with a neg­a­tive re­turn of 0.9%. That is a huge dis­rup­tion to how mar­kets func­tion in nor­mal times, but pol­i­cy­mak­ers on the fis­cal and mon­e­tary side are obliged to take these steps to pre­vent the econ­omy from col­laps­ing, even though they know their mea­sures are cre­at­ing bub­bles in sev­eral as­set classes.

Gold con­tin­ues to be a safer bet than chas­ing over­val­ued stocks. With yields ex­pected to re­main low for a long time, in­fla­tion pro­jec­tions likely to head higher in the months to come and geopo­lit­i­cal ten­sions on the rise, some great ingredient­s are present for the precious metal to con­tinue at­tract­ing in­flows. Only $50 away from the all­time high, it is only a mat­ter of short time for the yel­low metal to see a new record.

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