Strained relations

Posted by: Paul Donovan

28 May 2020

Daily update

  • Sino-US relations are still the main story, but now it is has become a bit more serious. Investors could dismiss unusually strong rhetoric and tweets, but overnight US Secretary of State Pompeo said that the US could not consider Hong Kong as being autonomous from China. This has consequences, as it may affect Hong Kong's trading status with the US. However, markets do not seem to be pricing in a full-scale trade dispute.
  • US data comes with initial and continuing jobless claims. The US economy has been opening up (unevenly), and has gone further in lifting restrictions than Europe has. The impact of this on labor markets is going to be watched closely. Interestingly, the Fed's Beige Book reported that some businesses were raising wages to compete with higher unemployment benefits. Higher incomes may have been saved in lockdown – the important question is what happens to those savings now?
  • The EU Commission published its proposals for common fiscal support yesterday. To the surprise of no one this was a compromise, though biased towards the Franco-German proposals. The principles of debt-financed grants remain intact.
  • The Bank of Korea cut interest rates a quarter point. The Bank of England's Saunders is due to speak.

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