Geopolitics gatecrashes risk-on party

The heightened uncertainties in the markets are causing further ventures into riskier waters to pause for breath, after what has been a bumpy ride for risk assets this week. Asian currencies are now weaker against the US Dollar as regional stocks are adding to Thursday’s losses, with Hong Kong’s Hang Seng index leading the decline. US equity futures are also in the red while US Treasury yields are lower by 4.3 percent. Gold is climbing back towards the $1730 handle and the Yen is advancing against all of its G10 and Asian peers.

Geopolitical risks are threatening to gatecrash an already-tense ‘risk party’ among global investors who have only just begun nibbling at the appetitisers. This craving could be soured by the prospects of escalating tensions between Washington and Beijing, be it over the coronavirus pandemic or plans to impose a new security law on Hong Kong. The recent gains in risk assets could be unwound should the ‘Tariff Man’ make a comeback or US-China capital flows be restricted at a time when the world economy is only managing its first tentative steps towards a post-lockdown recovery. China’s decision to forgo a GDP target for the year also speaks to the persistent uncertainties that markets have to contend with, which suggests that recent gains in riskier assets are on thin ice.

Although investors have been willing to look past the gloomy economic data so far, in the hope that the worst of the global pandemic has passed, such a view might be shattered if the barbs traded between the world’s two largest economies actually translate into actual policy action. Keep in mind also that Brexit risks are looming, with UK and EU negotiators set to resume talks on June 1. A sudden rise in the prospects of a no-deal Brexit would only add to the potency of downside risks and stir up market volatility.

In the interim, an extra dose of caution appears highly warranted.