Covid-19 figures prompt stock market surge

It appears that Monday 6th April may be remembered as the day that the global stock markets resurged and investors heaved a sigh of relief. This turnaround is due to the fact that it seems the global pandemic is peaking in the worst-hit countries, such as Spain and Italy, giving investors the green light to start buying again.

According to the New York Times European stocks were trading 2 to 4 percent higher after a modest rally in Asia picked up steam later in the day. At the time of writing the New York exchange hadn’t opened, but Futures markets are predicting it will also see a good day today.

In Japan, the Nikkei 225 index rose 4.2 percent. South Korea’s Kospi index rose 3.9 percent. In Hong Kong, the Hang Seng Index was up 2.2 percent. Taiwan’s Taiex was up 1.6 percent.

However, oil prices, which usually rise when there’s good news, are not doing so well due to the continued argument between Russia and Saudi Arabia. Owing to the coronavirus epidemic, demand for oil has dropped precipitously. Saudi Arabia and OPEC proposed a deal that would trim oil production in response, but Russia declined to go along with it. So the battle continues.

A stress test for Europe

Another thing that came to light in today’s news is that European banking regulators had planned to stress test banks to see if they could withstand another major economic downturn. As it happens, they didn’t need to run any simulation, because the real thing came along in the form of the coronavirus Covid-19.

The New York Times said, “Government officials planned on running their test earlier this year, and it was meant to simulate a 4.3 percent decline in European economic output by 2022.” But now they are faced with an even worse ‘worst case’ scenario.

Some economists predict that Europe’s economy could drop by over 10% by June, and the continent’s central bankers are concerned that the crisis proofing that they put in place, won’t be sufficient to cope with what promises to be a global financial meltdown. It’s a worrying time, as European banks have never fully recovered from the last big crisis in 2008. And firms like BMW are already recording a massive drop in sales. The German carmaker announced sales had plunged by 20% in January to March 2020 and that is probably by now a conservative figure, as most countries hadn’t gone into lockdown until mid-to late March. In the UK, car dealers sold 200,000 cars fewer than they did in March 2019. It isn’t the only industry under stress, and many big companies will be looking to expand their existing lines of credit.

But, for the moment, we can take some pleasure in the fact that Covid-19 infections and deaths appear to be declining in the worst hit places, and that there is still investor enthusiasm for global stocks.

Trump pushes China to the limit

Never mind Mueller’s report, Trump has his sights set on China this week, and as usual he has been tweeting about it. On 6th May he tweeted: “The United States has been losing, for many years, 600 to 800 Billion Dollars a year on Trade. With China we lose 500 Billion Dollars. Sorry, we’re not going to be doing that anymore!”

The President appears to be determined to escalate the US-China trade war and it appears to be ‘personal’, although he portrays it as a move in the national interest. He’s raising the trade tariff on Chinese imports to 25% this Friday, a large hike up from 10 percent.

Trump says that Chinese exports to the USA worth $200 billion will be slapped with this tariff. Furthermore, the same tariff will be imposed on other Chinese goods worth $325 billion, which are currently untaxed.

What effect has the announcement had?

Obviously there have been more than a few very miffed Chinese. And Chinese investors had a wobble, because they dumped stocks following the announcement. As a result, China’s major stock indexes plunged by the highest level since February 2016. Stock indexes also took a beating: the Shanghai Composite Index and the CSI 300 index fell by over 5 percent. Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong told Reuters, “The market is re-pricing the situation, as investors had thought trade negotiations were coming to an end.”

Why escalate a trade war now?

Trump’s decision to raise the tensions between two of the world’s biggest economies came at a moment when the US economy is in boom mode. As Mark Emem writes at Forbes: “The non-farm payrolls jobs report which was released Friday indicated that the unemployment levels had fallen to 3.6 percent. This was the lowest figure since 1969.”

Some commentators have suggested that the positive state of the US economy has led the President to believe that the country is in such a strong position that he has the upper hand in any trade negotiations. One Twitter user, Jim Cramer tweeted: “Is this the art of the deal? Or a recognition that our economy is stronger than theirs is and we don’t need them???”

And to quote Trump from his book “The Art of the Deal”: “MY STYLE of deal-making is quite simple and straightforward. I aim very high, and then I just keep pushing and pushing and pushing to get what I’m after.”

As Emem writes, Trump smells blood, because China has more to lose than the USA, therefore Trump is following his own philosophy of simply piling on the pressure wherever he can. It was thought that a trade deal between the two countries would have been agreed by the end of this week, but that looks unlikely now. And unless they agree a deal on 9th May, China will have to start paying the higher tariffs from the following day. That doesn’t leave much time for the negotiations, which are supposed to start on 8th May.

Will the talks collapse due to Trump’s game play, or will he get what he wants from China? We don’t have to wait long to find out.