Increased tension between the US and China (Daily analysis 21.05.2020)

21.05.2020 14:25|Bartosz Grejner

Tightening the rhetoric by the White House authorities against China may predict a worsening of sentiment in the coming months. PMI's weak data are slightly above expectations, but still far from optimism. The weakening of the dollar enables the zloty to remain in good condition.

Trump raises the pressure in US-China relations

For several weeks now, tensions have been growing in US-China relations. Even at the turn of the year, when the first phase of the trade agreement was reached, relations between the two powers were not perfect. Recently, both the White House administration and the US President himself have tightened their rhetoric against China, including blaming the country's authorities for hiding coronavirus facts, imposing restrictions on some Chinese companies, and - like last night - accusing (Donald Trump on Twitter) China of misinformation and propaganda attack on the US and Europe.

These accusations are not unjustified, but their accumulation makes the tension between the two parties more and more evident. In November, there will be presidential elections in the USA; hence, the likelihood that relations with China will improve is limited. Trump also pointed out to the Chinese authorities that they are "desperately" trying to help his opponent Joe Biden win.

It is not entirely clear whether Biden's victory would be a positive outcome for China. In recent weeks, Bloomberg has reported that Biden's camp is also planning to push hard rhetoric against China. The US and China clash last year, whether verbal or business (tariffs), contributed to a strong deterioration in market sentiment and strengthened the dollar. This potential risk, which has increased in recent weeks, should be taken into account in the coming months.

PMI is still far from being optimistic

Today an important publication was published - PMI indexes from the eurozone and the UK for May. They are essential because they already cover the period in which most countries have lifted restrictions. As expected, activity in industry and services remain at disastrous levels, but at a higher level than in April. April was a month that can now be seen as the bottom of the recession, and the path of recovery will be important, especially its shape.

The readings themselves were slightly higher than the median of the economists' estimates. 39.5 points for the industrial sector and 28.7 points for services are 1.5 points and 3 points above the consensus, respectively. However, this is still a very long way to the 50 point mark separating recession from growth.

The report does not sound too optimistic, especially in terms of employment. Companies have continued to cut down jobs at an unprecedented rate, and the retention of current jobs depends on how demand will return. If we look for indications in the countries that opened the earliest, demand is returning at a slower pace than supply, which may suggest increased pressure for further job losses in the coming months (the end of some aid programmes may reinforce this trend).

The market did not react strongly to these data. The main currency pair, i.e. EUR/USD, remains around 1.10. The continuation of the relatively weaker USD (compared to the last two weeks) helps the zloty maintain a relatively good condition: the EUR/PLN remains around 4.53 and the USD/PLN around 4.12. We are also observing a continuation of supply pressure on the pound, which also contributes to a decline of the GBP/PLN to around 5.03. Disastrous data from the Polish industry for April (a 24.6% annual drop in production) did not affect the zloty, imitating the behaviour of the broader market, which largely ignores historical data.


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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

See also:

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Economic confidence in Germany recorded a sharp jump (Afternoon analysis 19.05.2020)

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