What seemed just to be, at first, a technical "sale of overpriced expectations" on the last days of April, compounded by the end of the month, has gained another drastic spin and more disturbing fundamental base to fall. New threats of severe trade tariffs against China by US President Donald Trump and various members of his team could apply in retaliation for the alleged concealment of information known to Beijing authorities about the harmful potential of the coronavirus in the early stages of its spread.
The S&P500 and Nasdaq stock indexes bounced back down more than 70% from the wave of growth that has been steadily going up since April 21 and the European stock indexes CAC40, Xetra Dax and EuroStoxx 600 ate all the similar growth entirely. Moreover, the French index depicted a false breakout of the March 4500 resistance on the charts with a possible reverse downward movement technically. The Nasdaq index was also further sharply pulled down by sales of previously overvalued Amazon after the release of a corporate report and a sharp withdrawal of profits by many Tesla traders after more than strange tweets by the company's founder Elon Musk, like "Tesla stock price is too high imo" or "I am selling almost all physical possessions. Will own no house" on May 1. Whether his account is hacked or he's just fooling around and shocking the public, but Tesla's stock reacted on Friday with a strong drop from $780 to $700 per share.
But if to talk about really critical reasons then it is worth remembering how hard trade war agenda was for the markets in August and again in early October 2019, the sell-off sentiment in the markets last Friday, and then in the Asian and European hours of Monday. The puzzle gets well understood. It is no secret that the purchase of shares of many companies took place for almost six weeks rather in advance and in the hope of gradually recovering of their earnings despite the huge drop in their business now due to lockdowns around the world.
There are many debates about the shape of the future economic and market recovery model, whether it would be optimistic V-model in which the economy rebounds quickly from a temporary shock, or more realistic W-model, maybe even most pessimistic and stretched U- and L-kind models followed by a zigzag upward climb later. White House senior adviser Jared Kushner said to the reporters last week: "the hope is that by July the country's really rocking again" while the Federal Reserve Chairman Jerome Powell mapped out why he believes the economy may go through a series of peaks and bottoms for at least a year or more. "We're going to see economic data for the second quarter that's worse than any data we've ever seen," Powell said. Then he expects some "fleeting" come back by the third quarter as more US states begin to reopen. "This period as well that carries the risk of new outbreaks of the virus," he added. And after that period, according to Mr Powell, "the formal social distancing measures will be gone but you'll still be left with probably a level of caution on the part of people who will worry and probably keep worrying for some time," so many consumers are unlikely to be out in force anytime soon.
The possibility of such a movement in shallow waters is considered even by many much more optimistic experts. However, all of them hardly assume scenarios of treatment attempts against the background of another relapse of the restrictive trade tariffs between the two largest world economies. "We signed a trade deal where they're supposed to buy, and they've been buying a lot, actually. But that now becomes secondary to what took place with the virus," Trump told reporters on Friday night of May 1. "The virus situation is just not acceptable," he added.
At his White House press conference he "surprised" the audience that he has "high degree of confidence" virus came from Wuhan lab. He also gave a positive answer on the direct question if he have seen some evidence personally: "Yes, I have," he replied. He declined to give details, noting that the US authorities are investigating regarding this matter. The US national intelligence office said earlier it has agreed with a "broad consensus of scientists" who believe that the source of the coronavirus is not any laboratory.
Alas, the charges are gradually developing. The US Secretary of State Mike Pompeo said on Sunday that China "was responsible for the spread of disease and must be held accountable". And the Associated Press in Washington reported the existence of a four-page Department of Homeland Security intelligence document dated May 1, which states that Chinese leaders "intentionally concealed the severity" of the pandemic from the world in early January. They allegedly covered up the extent of the outbreak and how contagious the disease is to stock up on medical supplies needed to respond to it, intelligence document show.
Marked "for official use only," the DHS analysis states that China increased imports and decreased exports of medical supplies, and it attempted to cover up doing so by "denying there were export restrictions and obfuscating and delaying provision of its trade data," the analysis states. The report also says China held off informing the World Health Organization that the coronavirus "was a contagion" for much of January so it could order medical supplies from abroad. At that time Chinese national imports of face masks, surgical gowns and gloves increased sharply. Those conclusions are "based on the 95% probability that China's changes in imports and export behavior were not within normal range," according to the report.
Of course, there is no other confirmation that what is said in the report is true, and no one else said that they saw the evidence on the table of the American President. Nevertheless, all this may not matter much if words about the potential to "punish" China translate into tariff reality, and this possibility is extremely worrying for markets that are already hit by the coronavirus crisis. The worst fears that this could affect part of the US debt to China have been refuted quickly. The Washington Post, citing two people with "knowledge of internal discussions", reported that some officials had discussed the idea of writing off some of the massive US debt held by China. But White House top economic adviser Larry Kudlow told Reuters: "The full faith and credit of US debt obligations is sacrosanct. Period. Full stop."
When asked whether he would consider stop payments of US debt obligations as a way to punish Beijing, Trump said: "Well, I can do it differently. I can do the same thing, but even for more money, just by putting on tariffs. So, I don't have to do that." But how much consolation is this price of "soft" resolving the issue when even now 25% taxes are applied on Chinese goods totalling $370 billion? If the US authorities would decide to take advantage of people's anger during the pandemic to remove global industrial supply chains from China then maybe in years to come this may have a positive effect on the national economy of the United States. But at the beginning such measures will have severe impact to the economy weakened by quarantine downtime. This can affect both the US and China, and almost the entire world. Of course, the markets may also be hurt badly.
This week could be a defining one for the equity markets in many ways. There is a real risk of rolling into the full-scale right side of the "W-model" with a following test of even March market bottoms in some shares prices and indexes. Or, if the markets still believe in more economically normal scenarios and downward corrections are moderately limited this moment would at least become a test for the market's stress tolerance. Optimists are left to assume that most of the threats are another negotiation and/or just an election move by President Trump, and they could be exchanged soon for another concessions from China in trade relations.
Last year, the American President was menacing on Twitter, but accommodating later and quickly backed down. Markets managed to make downward corrections and then climbed again developing a rally as if nothing had happened. Perhaps Trump's cat-and-mouse game with the markets and with China is awaiting us this spring too? It remains to be seen how this game will be played. Markets are extremely cautious now, and corporate bonds activity is higher than in shares at still expensive levels.
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