Geopolitics Stings Sentiment But Dip-Buying Is Relentless

Submitted by Eleanor Creagh, Australian Market Strategist at Saxo Bank

Summary: After a hesitant overnight session on Wall Street, Asia trades heavy as geopolitical concerns come to the fore, fears of rolling COVID-19 outbreaks mount and dollar strength tentatively resurfaces. We look to the US cash session tonight for confirmation of continuing bearish price action, although remain skeptical of follow through following the relentless dip buying that has accompanied the FOMO trade in recent weeks.

As we wrote yesterday, 2nd infection waves in China and South Korea as restrictions are relaxed throws a spanner in the recovery narrative being feverishly priced in equity markets.

If we are to live with rolling outbreaks until a vaccine is delivered, it is hard to justify current valuations. The recovery in equity markets has run well ahead of earnings expectations in the event of anything less than an aggressive V shaped recovery. At this juncture, we remain cautious and see few remaining positive catalysts to drive continued upside in equities. But this view must be balanced with retail investor flows and speculative positioning betting on a sharp rebound along with unwavering central bank support that continues to drive equities higher. Hence, we favor a barbell approach remaining long secular thematics and earnings duration offset against left tail hedges as opposed to outright short equities. For more, see yesterday’s update and Peter Garnry’s update.

It is our view, US/China relations continue to deteriorate in a slow-burn disentanglement and there is no going back to the pre-trade war relationship. Those long-term frictions are making headlines once again as the COVID-19 blame game reignites the underlying slow burn tensions. FOX Business reports President Trump is moving to cut investment ties between U.S. federal retirement funds and Chinese equities. The President is also inferring that he has no appetite for renegotiations on the Phase 1 Trade deal with China, a problem for a beleaguered China, facing a double hit both internally and via the external demand collapse due to the COVID-19 outbreak. Although timing has always been vague at best and the size of the purchases a tough ask at the best of time, the capacity for China to uphold their end of purchase agreements in a timely manner is reduced given the current state of the economy and pressured demand outlook.

To date the bark has been worse than the bite in terms of the antagonistic rhetoric, although second-guessing the mercurial President Trump’s next move has long been a losing strategy. The upcoming election may provide increased impetus to elevate the geopolitical frictions if they play to US voter support, which is as ever a rolling calculus. However, we are again reminded that no one “wins” a Trade War, except perhaps gold.

China/Australia relations are also in the hot seat along with reports that China has suspended meat imports from at least four Australian abattoirs overnight, as trade tensions between Australia and the communist nation rise. The move saw the AUD trade sharply lower, however later reports that Australian Trade Minister Simon Birmingham “believes Australian meat exporters having "minor technical breaches" with China” calmed nerves. Although it remains clear, diplomatic tensions between the two countries are mounting as Australia moves to support an investigation and inquiry into the COVID-19 breakout, refusing to be strong-armed by Chinese threats. While de-risking via diversification of Australian exporters into other markets like India and the rest of South East Asia would support long-term goals, reduced Chinese demand for Australian goods and services pose a risk for the Australian economy. Particularly as China remains the number one purchaser of both Australian goods and services exports. However, it is clear that demand comes at a price Australia may not be willing to pay.