US-China trade tension and rising COVID-19 infections have resulted in negativity creeping into the iron ore market, the greenback, and European shares. The global outlook is being shaken by the threat of a second European wave and a continued rise of infection levels in the US.
The uncertainty has seen gold rally to an all-time high with investors taking a flight to safety as COVID-19 is coupled with the fallout of US-China relations. Consulate closures last week added to the fear factor; leading to tit-for-tat retaliations that have signaled a further deterioration in a relationship that seem to be determined to end in divorce, rather than marriage counselling. ‘Stronger together’, a slogan that does not seem to be appropriate currently, brings us back to a subject of reliance.
Interlinked by government debt, the reality is a separation rather than a divorce would seen to be the logical way forward. Money is King, China buys US debt in the largest and most liquid debt market in the world. Unwinding current debt would be far too damaging for both economies and would suggest we are in for another round of handbags at dawn, verbal bashing and a little bit of playground posturing.
Tensions maybe high, trade might totter, economies might shrink a little and some self-reliance might be the temporary solution. The long-term future might be mutual dependence but it is the here and now that has investors worried.
Is it that bad?
Investors are taking no chances: returns, or pairing of losses, is what is driving gold, but the reality is both economies seem well placed to bluster through the rising infections and their current disagreement. Today’s bad news is often followed by reflection, a chance to analyze the potential over-reaction to the headline grabbing news from the previous day.
China is investing in infrastructure, iron ore is above USD 100/tonne, a level that is unsustainable for long periods of time unless steel margins increase rapidly. European shares are being driven by flight and travel coming under pressure due to rising EU infections, the dollar index is genuinely in trouble. Gold is seen as less political than the greenback, does not have rising infections and is an all-round go-to when an escalating crisis is afoot.
With the Chinese economy holding up, the question is how bad things are really in the US economy? Rising infections and rising tensions mean it is not at the top of the list to put your money. The weaker dollar is broadly positive for US exports and should benefit its industrial sector, so from an economic standpoint has some benefits.
If the US dollar represents the near-term sentiment of the market at this point, then the S&P 500 should coming under the same selling pressure. Is it not a bellwether of the US economy?
The S&P 500 index unlike the dollar index continues to go up. This is been driven by the investors that believed in the U.S economy and who are now finding support in the earnings expectations sector.
This shows the number of companies that have revised the outlook for their future earnings, which is higher than previous analyst estimates. This is not sentiment-driven, it is not political, it is just a little piece of information that would suggest that rising Gold and falling dollar prices are the ‘outside story’.
Those with their ear to the ground have held fast in US equities as the inside story for US companies is showing positive signs that like its Chinese counterpart it will withstand the storm and push on regardless.
The world’s two largest economies are making a lot of noise, sentiment is negative for now, but the reality is that the second largest economy is expanding, and the world’s largest economy has increasing earnings expectations.
Maybe iron ore is just too high, gold is a safe bet, the EU outlook is coming under pressure and just maybe the US is happy to see its currency weaken as it has many benefits for its economy.
In this scenario, perhaps weakening sentiment is more positive than we realise.