Stocks are ending May on a slightly downbeat note, but investors have definitely been accentuating the positive this week and for the whole of May.
Thank goodness, Covid-19 is getting bumped off the headlines; trouble is it’s not for good news. At last though we are seeing some caution displayed in the markets over China’s decision to impose national security legislation on Hong Kong and the ensuing ramp up in US-China tensions. US stocks were positive for most of Thursday before sharply reversing in the last hour and closing in the red, after the White House announced that Donald Trump would hold a press conference on China on Friday. ‘We are not happy with China. We are not happy with what’s happened’, he said. The UK, which signed a joint statement condemning China for its actions with Australia, Canada and the US, is opening the door to citizenship for 300,000 Hong Kong residents.
Given how stretched valuations have become, worries about US-China tensions don’t seem fairly priced in. As previously noted, investors need to be prepared for things to get worse from here, particularly given the backdrop of a looming election for a second term, the worst recession in memory and 100,000 deaths from Covid - blamed on China - and the trade war, which is still rumbling on. The pressure on Donald Trump at home is high. The press conference today will likely see Trump increase the war of words with China but he could go further and announce further sanctions on individuals associated with law, or revoke Hong Kong’s special status with the US on trade.