War – what is it good for?


Market Update: 7 May 2020

As US Mike Pompeo continues the tirade against China’s handling of COVID-19, China retorts that now is not the time for investigating. So is this a war of words or an escalation of trade war?

As S&P closes lower but US 10yr treasuries rally in yield to 0.74%, one might consider this just an illiquid anomaly, but as the US government issue more bonds to fund its Fiscal stimulus and these comments continue (including threatening not to pay China back on their bondholdings), it’s possible to see a buyers strike by China to prove a point. Rhetoric could certainly be ramped up tonight as well as China reports an April trade surplus of US45.34Bln vs anticipated 8.7Bln – these will fuel fire for Trump on why increasing tariffs will rebalance this.

How will Australia be affected? Well, at least March seemed that people like what we dig out of the ground as our trade balance showed an increase in our exports of non-monetary gold by 225% alongside an increase in exported goods whilst unsurprisingly services were down.

There is pressure from the business sector for the Government to not choose sides – should we keep to that mantra, AUDUSD could still fall on risk aversion, but trade continuation will bring it back to some degree. As China is not necessarily buying for domestic consumption, this could still be reliant on global trade demand – so as a whole, it’s detrimental and will affect market perception.

Sources: Bloomberg

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