Relations between the world’s pre-eminent economic superpowers are fraying again amid the spread of Covid-19, adding another element of uncertainty to an already grim growth outlook.
In recent days, US policymakers have ramped up their rhetoric against Beijing for its handling of the coronavirus outbreak, threatening retaliatory measures that include curbing investment flows between the two countries and altering supply chains. The deterioration comes just a few months after the US and China agreed to a “phase-one” trade deal, which saw Washington roll back some of its existing tariffs and China agree to buy more US goods and services.
Investors are now braced for a revival of tensions last seen at the height of the US-China trade war last year, especially as the November 3 presidential election draws nearer.
“There is no question that China will play a starring role in the 2020 campaign,” said Ernie Tedeschi, policy economist for Evercore ISI.
Paul Ashworth, chief US economist at Capital Economics, forecasts a “renewal of antagonism” between the two superpowers in the run-up to the election. But he expects the US to just “stick mostly to threats”.
More concrete retaliation could bring severe volatility, especially if Washington were to pursue harsher measures such as sanctions or additional tariffs.
“As we saw last year, US-China tensions can be significant drivers of market trends, even if the direct impact of tariffs and other actions is relatively modest,” warned analysts at Goldman Sachs. Colby Smith
Will the Turkish lira continue to fall?
The Turkish lira hit a record low on Thursday, passing the nadir it reached during a 2018 currency crisis. Many analysts think that it still has further to go unless policymakers change course.
The country’s central bank repeatedly slashed interest rates over the past 10 months under the watchful eye of President Recep Tayyip Erdogan, who has been eager to kick-start a credit-fuelled boom in growth after a downturn last year.
Even before the coronavirus pandemic swept the globe, that aggressive rate-cutting cycle had prompted warnings from economists that it would stoke domestic demand and destabilise the lira.
The fallout from Covid-19, which has seen investors take flight from riskier emerging market assets, has exacerbated the pressure on the currency as investors have fretted about Turkey’s large external financing needs and its low foreign exchange reserves.
Turkish authorities have persisted with efforts to support the lira, burning through billions of dollars in precious reserves, while taking measures aimed at making it harder for foreign investors to bet against the currency. But that could not prevent it reaching a new all-time low.
Goldman Sachs said that pressure on the lira was “likely to continue” unless Turkey were to raise rates, find an external source of dollar funding or witness a significant boost in exports.
That view was echoed by TD Securities strategist Cristian Maggio. “Unresolved structural issues will continue to play against the lira, while the [central bank’s] reserve burn that has helped contain further weakness is not sustainable,” he wrote in a note to clients. He predicted “significant” weakening to come. Laura Pitel
How long will the rally in copper last?
Copper prices rose about 3 per cent last week on hopes of a recovery in the Chinese economy and continued efforts to boost demand from global policymakers.
The price of the red metal is up 20 per cent since its low of $4,371 a tonne on March 19, which was the lowest since January 2016.
Copper has benefited from a shift in sentiment in China, where traders are betting on easing credit conditions and the unveiling of further stimulus measures at the National People’s Congress on May 22.
The price was also given a boost by positive April trade data from China, which showed a 23 per cent increase in imports of copper concentrate, the raw unprocessed material that is bought by smelters.
Premiums to buy physical copper in Shanghai rose to $105 a tonne last week, according to data group SMM, which is the highest level since November 2018.
Still, copper prices could fall back down after the NPC later this month, said Max Layton, a London-based analyst at Citigroup, as Chinese businesses work through inventories of finished goods and economic growth remains weak outside China.
“That destocking together with seasonal consumption weakness will be enough to keep speculators on the sidelines,” he said. “We could see a significant pullback . . . down to $4,800 a tonne.”
An escalation of US-China tensions could also hit the outlook.
However, by the end of the year, as global growth picks up, copper prices could improve, Mr Layton said. Unlike in the financial crisis of 2008/09, he noted, supplies of copper from mines and scrap sources had dropped this year due to the logistical constraints of coronavirus.
“You just need oil to normalise and a slight improvement in global macro sentiment to cause some rebalancing in the market,” he said. Henry Sanderson
Source: Economy - ft.com
