Weekly review: What does China tensions mean for the markets?

Benjamin Weiss, Friday, 24 July 2020

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A global pandemic was enough to not so much eradicate, but more put tensions on hold between the US and China that at one point seemed particularly hostile. However, these tensions have arisen once more, only this time the UK is involved as well. But what could this mean for the markets? Elsewhere, major companies continued to report earnings and Tesla had yet another strong week that puts it well on track to join the SP 500 index.

US China tensions - Here we go again

Tensions between the two largest economies in the world were covered in vast detail toward the end of last year, where it seemed hostilities were at an all-time high. Since then, with the distraction of the conronavirus, things have been put on the back burner… until now.

A combination of catalysts seems to have re-sparked those existing tensions between the two economic heavyweights. Stolen technology claims have once again been at the forefront, but also the handling of the pandemic, China’s bid to impose further rule over the (previously) autonomous region of Hong Kong and more recently the country’s treatment of Muslims have all contributed for the reignition of tensions. It has resulted in Donald Trump demanding the closure of a Chinese consulate in Houston, Texas, after claims Chinese agents were trying to steal medical research in the area. China retaliated today by ordering the US to close its consulate in Chengdu, but could there be more to come?



What’s more, the UK involvement intensified this week following pressure on the government to denounce China’s treatment of Muslims and do more to prevent it happening. This is after the UK announced it would admit up to three million Hong Kong citizens to seek refuge in the UK just a couple of weeks ago, which already angered China.

So, what does this mean for the markets?

Without any context, anything involving the two largest economies is going to have the potential to shift markets heavily. Given that these tensions are intensifying, it seems there’s a fear of what could come which could ultimately weigh in on markets the most.

The dollar is at a 22-month low against several currencies, and has been the biggest casualty from the tensions. Oil, on the other hand, has benefitted after struggling with a lack of demand throughout 2020. With the dollar currently very weak, investors can capitalize by buying oil, given it’s priced in dollars.

brent crude graph

For the moment, the reaction has been fairly subdued in comparison to what happened during the trade war, however there’s always that potential for things to escalate further. It’s not as likely that either party will turn to tariffs to once again damage the other, but it will be interesting to see what tact both nations use to try to impact the other. Of course, this could be the worst it gets, but that’s optimistic thinking. The markets will have a close eye on how this situation progresses, with any individual action from the other capable of sparking large moves.

Tesla closes in on S&P 500 listing

Another week, another mention of Tesla. But it’s not without justification.

The car manufacturer has been one of the stand-out performers in 2020, admittedly against weakened opposition, and its latest earnings report might have just put the cherry on the top of an S&P 500-shaped cake. The report showed Tesla beat analyst expectations which bolstered its share price, but the most important factor of the report was undoubtedly the fact that Tesla was reporting its fourth consecutive quarter of profit. This was the final requirement for the company to be up for consideration to be listed on the S&P 500 index, along with the likes of having a market cap of $8.2 billion and already being listed on one of the other major US indices.

Just because Tesla can qualify, it doesn’t mean its admission onto the index is a foregone conclusion. However, given its status and the fact that it would be the largest company to ever be added to the index, it’s a common consensus that when there is the option for firms to be added, Tesla should be top of the list. At the time of writing, its share price is up nearly 230% this year alone.

tesla graph

Ryanair cutting ties in Germany

Ryanair suffered a major setback this week as it decided to close its German bases. The Irish company is notorious for cost-cutting and trying to milk as much as possible from customers embarking on their cheap, European-based flights, and it’s the same story this week, only it’s their own pilots caught in the crossfire.

Pay-cuts were proposed to pilots as a measure to offset losses due to the reduction of flights, but this was rejected. As a result, Ryanair is looking to shut its base at Frankfurt Hahn Airport, putting a number of jobs at risk. It’s also threatened to close two further German hubs if necessary. Ryanair has lost nearly 28% of its share price this year, but will look to the next two months as a crucial period to see how many of their losses they can salvage - with holiday destinations reopening for tourists.

ryanair graph

Who needs personal hygiene during corona?

The pandemic has done little to help the economy for the most part, and it seems it has also not gone far in encouraging personal hygiene. With millions across the country restricted to working from the confinements of their own homes, the demand for items such as deodorant and shampoo has declined significantly - according to unilever. On the flip side, ice cream is filling that 150ml-cannister-shaped hole in our shopping baskets, with sales of the dairy dessert up 26%. This shift in behaviour patterns could begin to have longer-term consequences on companies should the lockdown situation continue throughout 2020.

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