U.S./China relations fray
- July 27, 2020
Major U.S. equity indices moved lower for the week as rising tensions between the U.S. and China and increasing hospitalization rates in the nation’s COVID-19 hotspots dominated headlines and soured investor sentiment.
Prior week summary
The major U.S. equity indices moved lower for the week, snapping a three-week stretch of gains for the S&P 500, as rising tensions between the U.S. and China and increasing hospitalization rates in the nation’s COVID-19 hotspots dominated headlines and soured investor sentiment. Relations between the world’s two economic superpowers have frayed in recent weeks with President Trump criticizing China’s initial response to the COVID-19 outbreak in Wuhan, China, and signaling a lack of interest in negotiating the terms of the Phase 2 trade deal in the near term. Further escalating tensions, the U.S. State Department ordered China to vacate their Houston consulate on Wednesday after citing medical research theft and visa fraud as reasons for the ordered closure of the consulate. China was quick to respond to the Trump administration’s move to close the Houston consulate and ordered the closure of a U.S. consulate in Chengdu, China on Friday suggesting that the U.S. consulate was engaging in “activities inconsistent with their status” and describing the decision as a “legitimate and necessary response.” Speaking on Friday, Chinese Foreign Minister Wang Yi, blamed Washington for the recent rise in tensions saying, “Current difficulties in China-U.S. relations are completely created by the U.S.,” and suggested that Washington’s aim is to, “disrupt China’s development by all means fair or foul.”
As of Sunday evening, the U.S. infection count sits just under 4.4 million confirmed cases, over a quarter of the global tally, with nearly 150,000 individuals succumbing to the virus. The recent surge in cases throughout the southern U.S. and California continued last week with Florida overtaking New York as the second hardest-hit state by case count, topping 400,000 confirmed cases, and setting fresh records for daily increases in new cases. While the seven-day moving average for new cases has recently ticked down, Florida has seen both the death rate and hospitalization rate increase in the last two weeks. Florida Governor Ron DeSantis looked to provide an encouraging word on Friday saying, “I think that we're seeing some positive momentum. I do think that we are going to head in a better direction here shortly," and added, "I would much rather be in a plateau than be in an escalation. We clearly stabilized with the cases. We're definitely trending in a better direction. We're trending much better today than we were two weeks ago."
On Capitol Hill, the GOP finalized the details of their COVID-19 relief package on Sunday after negotiating the terms of the deal for much of the week. The package is expected to cost $1 trillion and looks to provide funds for a second round of stimulus checks and to modify the unemployment insurance boost that currently sits at $600 per week and is set to expire at the end of the month. The Senate proposal looks to set in motion negotiations with House Democrats, who passed a $3.4 trillion relief package in May, on a finalized bill in the coming days. Speaking on the timeline for the negotiations, Treasury Secretary Steve Mnuchin, told reporters on Sunday, “We can move very quickly with the Democrats on these issues. We’ve moved quickly before and I see no reason why we can’t move quickly again. And if there are issues that take longer, we’ll deal with those as well.”
The look forward
Market participants are gearing up for a busy week of economic data releases with updated figures on consumer spending, durable goods orders, initial jobless claims, and the first reading of second-quarter GDP dotting the economic calendar. The FOMC will hold its two-day policy meeting on Tuesday and Wednesday.
Market implied policy path (Overnight indexed swap rates)
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.20-0303
Our featured insights
The major U.S. equity indices moved higher for the week amid stimulus bill negotiations on Capitol Hill, rising tensions between the U.S. and China, and a deluge of economic data releases.
Major U.S. equity indices ended mixed for the week as market participants digested second-quarter corporate earnings results, stimulus bill negotiations on Capitol Hill, and COVID-19 vaccine developments.
In reviewing what has transpired in the commercial real estate (CRE) lending markets over the past six months, we found it helpful to re-read our market commentary as it was written at the end of each of the last three quarters.
Week began shaky as resurgence of COVID-19 dampened investor sentiment and renewed fears that the country could be headed for more lockdowns.
After a record 20.4% monthly contraction in UK GDP in April, the expectation was that with some businesses able to reopen under strict conditions in May, there would have been a solid rebound in output.
Major U.S. equity indices pushed higher on the week, as positive developments in the hunt for effective COVID-19 treatments and a vaccine improved investor sentiment.
Now that we’re halfway through 2020, let’s examine how we got here and what the second half of the year might bring.
Considerations around risk management and hedging start with the economic factors. But REITs (as SEC filers) applying U.S. GAAP accounting must also contemplate the financial reporting ramifications of their hedging decisions.