China dominated the headlines last week, with a sequence of strong stock market gains only halting slightly at the end of it. Bullishness on the part of Chinese retail investors was attributed to positive comments in the state media about the prospects for equity markets, before the government rowed back its message on Friday, causing the Shanghai composite index to slip back a little. However, that followed gains worth 16 per cent over the previous eight sessions, their longest rally in more than two years.
This strength came against a backdrop of improving Chinese economic data, apparent in the Purchasing Managers Indices where the official manufacturing index rose to 50.9 in June from 50.6 in May while the non-manufacturing index increased to 54.4 from 53.6, taking the composite reading to 54.2, the highest reading since May 2018.
Its gains were also accompanied by firmness in the yuan, with the USDCNY exchange rate falling below the psychological 7.0 level, above which it has spent much of the coronavirus crisis.
However, it also drew comparisons with the bubble of 2015, as margin loans rose to their highest levels in five years, which ended with a subsequent market collapse.
Many longer term structural problems facing the Chinese economy remain, such as the surge in debt-GDP, and likely changes to global supply chains may present new long-term challenges. Also seemingly overlooked by markets were the numerous headlines regarding China’s souring relations with much of the world over coronavirus, and also over the backlash against the security law for Hong Kong.
Global markets were nothing like as positive, however, with the S&P, the FTSE and the DAX continuing to pause. Rising US-China tensions in particular were a source of concern, with Beijing saying it will retaliate against US sanctions. US President Donald Trump meanwhile cast doubt on the likelihood of reaching a phase two trade agreement with China, saying that the relationship with China has been "severely damaged".
A rising number of coronavirus cases around the world were also responsible for heightened risk aversion, with Hong Kong seeing a second wave of infections, forcing it to close schools from this week. Japan and Australia also saw more cases, while in the United States a number of states recorded their largest single day increases in Covid-19 deaths, giving rise to fears that lockdowns there could be reinstated.
Separately during the week, the US Supreme Court's ruling that a New York City grand jury could have access to president Donald Trump's tax returns and other financial documents had already caused a fresh wave of safe haven flows, demonstrating increased sensitivity to political developments as the November election draws nearer.
The cancellation of election rallies and the commutation of prominent Trump ally Roger Stone’s prison sentence over the weekend also signal the likelihood of a highly unusual election race, with the coming months likely to see often unpredictable political headlines impacting sentiment.
Gold prices rose above $1800 during the week for the first time since 2011, taking its rally to 25 per cent over the past year. As well as benefiting from the persistent uncertainties about the economic outlook, the demand for it also partly reflects concerns that the scale of central bank monetary stimulus may at some point cause a sharp rise in inflation.
Other markets do not appear as concerned by inflation however, with US bond yields falling to their lowest levels since the lockdowns began being relaxed, with 10-year yields dropping below 0.6 per cent at one point while 5-year yields reached a record low of 0.26 per cent.
The dollar was little changed overall, alternating on the ebb and flow of risk sentiment, with only the Japanese yen posting consistent gains, reflecting its wider safe haven appeal.
The International Energy Agency meanwhile warned that the new flare-up of coronavirus cases could weaken the demand for oil even as the price appears steady around the $40 per barrel level.
That the markets were able to claw back some gains at the week’s close was because of more positive news about a possible Covid-19 vaccine, a reminder that for all the uncertainty and concerns in the world, it is still the only issue that really counts.
Tim Fox is a prominent regional economist and financial market analyst