Week in Review: Sino-US Tensions Escalate

Global stocks rose for the week as investors were buoyed by progress in vaccine trials and optimism over the reopening of economies, however the week ended a little more subdued as the prospect of an escalation in tensions between the world’s two largest economies seems to be gaining traction.

The Chinese government moved to assert its authority over Hong Kong on Friday after announcing a plan to impose a national security law on the city. The proposed national security law would allow Beijing to bypass lawmakers in Hong Kong and ban “treason, secession, sedition and subversion”.

Mike Pompeo, US secretary of state, said the decision to bypass Hong Kong lawmakers ignores “the will of the people”. This intervention and other comments by US officials are likely to infuriate the Chinese government, with Sino-US relations already strained by disputes over trade and the coronavirus pandemic. Hong Kong police fired tear gas and pepper spray at demonstrators earlier today, as thousands gather for the first protest since Beijing's controversial plan to directly impose national security laws on the city.

Germany and France proposed a EUR 500 billion European Union (EU) recovery fund, giving impetus to a coordinated European fiscal response to the coronavirus pandemic. The European Commission would raise the money in the capital markets and use it to support EU spending rather than loans to national governments. If approved, the fund would be the first US-style fiscal transfer in the EU.

Global equities posted strong gains over the week. In the U.S., the Dow Jones (+3.29%), S&P 500 (+3.4%) and Nasdaq (+3.44%) Indices were all positive. Similarly, European markets were stronger with the Euro Stoxx 50 (+4.86%) and FTSE 100 (+3.34%) gaining over the week. Stocks in Japan also posted gains for the week with the benchmark Nikkei 225 Stock Average advancing 351 points (1.8%) and closed at 20,388.16.

Following the news of China’s plan to impose a national security law on Hong Kong, both the Hang Seng and the mainland A-shares weakened on Friday, with the Hang Seng Index plunging 5.6% to close 3.6% lower week on week and the Shanghai Composite down (-1.91%) from last weeks close.

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Market Moves of the Week

In South Africa, the SA Reserve Bank cut interest rates by 50 basis points on Thursday which is expected to bring further relief to SA’s battered economy, most of which is still under lockdown. The cut takes the benchmark rate to 3.75%, its lowest level since the repo was introduced in 1998. The Bank now expects a contraction of 7%, while it forecast consumer inflation to average 3.4% for the year. The repo rate has now been cut by 275bps since the beginning of 2020.

Co-operative governance minister Nkosazana Dlamini-Zuma has tabled draft level 3 regulations that propose lifting the ban on alcohol sales, but extending the prohibition on cigarette sales. The regulations also propose opening up all sectors of the economy from June 1 except hotels, restaurants, bars, gyms and other recreational facilities.

The Johannesburg Stock Exchange (JSE) followed the main global markets, with the benchmark FTSE/JSE all-share index gaining 1.04% over the week.

The rand ended the week at R17.60/$, appreciating by over 5% on the week.

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Chart of the Week

Source: Forexlive. Hong Kong’s Hang Seng Index tumbled the most in almost five years after Beijing said it plans to pass a security law that will curb secession and sedition in the city, a move that will raise the political risk in the former British colony and add to tension between China and the US. The benchmark sank 5.6 per cent, or 1,349.89 points, to 22,930.14 on Friday, its biggest decline since July 2015.

 

Whilst volatility is likely to continue amid current market uncertainty over the coronavirus pandemic, our message to all investors remains the same – stay calm in making decisions that are aligned with your long-term goals, not current market conditions.

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In any market environment, we strongly believe in the importance of having a portfolio that contains a variety of asset classes, including stocks and bonds, balanced in a way that reflects the investors risk tolerance and investment timeline.

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