SinoUStensionsandclosingofChineseconsulate

Yesterday the main news which took markets by surprise was the US order for the closure of the Chinese consulate in Houston, USA. Secretary of State Mike Pompeo said that the decision was taken because China was “stealing” intellectual property. Of-late there have been multiple flash points between the two countries like the origin of coronavirus, unfair trade practises by China and the new security law imposed in Hong Kong. But the latest move ups the ante as it makes the leap from the realm of rhetoric to on the ground action. The Chinese foreign ministry has condemned the move but has so far not taken any retributory action.

The markets, though, have not shown the kind of nervousness which was the hallmark of reaction when the trade negotiations were taking place last year. One interpretation can be that maybe the recent spike in aggressive posture is more due to the impending elections. The US elections are due in close to 100 days and as the season of opinion polls and approval ratings has started, it is natural that the incumbent takes recourse to aggressive posturing. Francis Fukuyama in his book The End of History describes the working of libertarian democracies and the curse of elections. He writes about the compulsions of elections forcing the democratically elected leaders to trade short term benefits for long term damage. It would be interesting to keep a keen eye on the opinion polls and expect an ebb and flow in rhetoric completely in line with the poll results.

Following on from yesterday, the Euro, Sterling and Gold continue their good run. The Euro is trading at 1.1580. Gold is trading at 1868 $/ oz and has shown close to a 22% rally this year standing confidently around nine year highs. We had written yesterday that apart from the safe haven allure, gold also allows a hedge against inflation and collapse in the value of fiat currencies. The US Dollar index is trading around 94.90 which is the lowest level seen since March. The 10 year US treasury rate is trading around 0.6%.

Domestically, the Rupee has opened stronger vis a vis yesterday’s close. It is trading around 74.65 currently. The annualized forward premia is trading around 3.9% levels.  The 10 year benchmark bond has opened at 5.81 levels, mostly unchanged from yesterday. 10 year paper has traded in a narrow range of 5.78-5.83 for the last 2 weeks which indicates that the fate of policy in the next MPC is hardly a done deal. The range might vary from a pause to a 50 bps cut making it difficult for the market participants to take an aggressive one sided bet.

Corona cases in the world have finally topped the 15 million mark and decoding the nature of the virus has been an elusive quest so far. In a media briefing last night US President Trump called Coronavirus the “China Plague” and announced a deal where the US government will buy 500 million doses of (still under preparation) vaccine from a US pharma giant.