The tensions between the US and China have once again risen to the top of investors’ concerns and the dollar is benefiting during early Monday trading, rising 0.5% in relation to a basket of other major currencies. The dollar’s strength results from higher demand for safe havens, due to a deterioration in the Sino-American relationship after a White House official threatened to impose sanctions in response to the new security law that China plans to deploy in Hong Kong.
In such a scenario it’s not surprising to see the increase in demand for refuge assets, because the return of the trade conflict between the world’s two largest economies would not be good news for a global economy already battered by the coronavirus crisis.
European stocks opened slightly higher on Monday following a mixed trading session in Asia, particularly in Hong Kong where shares extended Friday’s losses amid mounting tensions with China. The return of violence in the region is seen as a new bearish factor for share markets as traders fear it could lead to deeper US-China tensions on a short to mid-term basis. However, investors’ optimism does appear live and well for now as shown by Friday’s trading session during which traders surprisingly pushed stocks higher at a time when China was toughening its tone against Washington. Most investors are now betting on a recovery and have a strong positive bias with traders focused on economies reopening and tending to exacerbate any news supporting the bullish trend despite bearish leverages continuing to pile up. This is a dangerous situation that could lead to sharp downside market moves before summer if both future virus and macro data don’t match investors’ expectations.
No clear direction or high volatility is expected today as both the UK and the US will be closed for bank holidays. The Stoxx-50 Index continues to trade sideways between 2,855 and 2,950 points with today’s trading likely to remain with a very narrowed 2,905-2,950pts trading range.