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Two Things You Need To Know To Start Your Day
NEWS

Two Things You Need To Know To Start Your Day

US-China tensions have escalated, and this has eased off the stellar rally in the U.S. equity markets that we experienced yesterday. However, both the European and U.S. futures are still trading higher but not with the same momentum.

Escalation
Beijing is considering imposing a security law on Hong Kong, which has led Trump to threaten Chinese officials, businesses, and financial institutions with a range of sanctions. Donald Trump, the U.S. president, has said that Beijing’s interference in Hong Kong with a security law will threaten Hong Kong’s position as a financial hub.

Foreign exchange traders are wary of this heightened tensions between the two superpowers, and they are switching to currency proxies to hedge against this risk. It looks like traders are returning to the blueprint of the strategies they used last August when similar friction between the U.S. and China erupted over a trade deal. If history repeats itself, watch for the Taiwan dollar and Hong Kong dollar (HKD) to experience mammoth volatility.

Tuesday’s option activity proved HKDUSD to be one of the most traded foreign exchange pairs. This currency pair has become the instrument of choice among speculators. Yesterday, the pair saw nearly $1.4 billion in options traded. The upside is that any weakness in the Hong Kong dollar that pushes the pair below 7.61 per dollar makes the trade profitable. Options activity for the Taiwanese dollar was also noteworthy as investors increased their call options on the dollar by nearly four times.

Traders are preparing for both the Taiwanese dollar and Hong Kong dollar to lose their value over the next month. Trump’s strong stance against China shows he is determined to punish Beijing.

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The Circus
Equity markets continue to react to vaccine news as pharma companies race to develop a vaccine for Coronavirus. So far, the results are still at a nascent stage, and the pharma companies remain far from the end goal. Yet, equity markets react to any positive news about the Coronavirus drug trail as it is the ultimate solution to all their problems.

Last week, we saw the Dow Jones surge over 1000 points during Monday’s trading session, and yesterday’s price action was similar. The S&P500 was only nine points shy from closing above the 3,000-mark while the Dow Jones was off from closing above the 25,000-level by five points.

This is because investors anticipate higher business activity levels and life returning to normality. Any further positive development on the vaccine front is likely to empower the bulls. We may also see another stellar rally in the U.S. equity markets

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