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US-China Tensions Add to Market Unease

Risk assets are attempting to shake off the recent spike in US-China tensions, with Asian stocks and US futures looking to have found a more solid footing after a wobbly start to August.

As if there wasn’t enough to deal with already, amid persistent uncertainty over the pace of US rate hikes and global recession risks, markets now also have to contend with the resurgence in US-China tensions – a familiar nemesis to risk sentiment in recent years. The aggressive tone emanating out of Beijing in response to Pelosi’s visit to Taiwan has made for a classic safe haven play in recent sessions, with gold and Treasuries rising in tandem with the US dollar and the Japanese Yen.

If risk assets are to meaningfully extend their July gains, market participants need to be comforted knowing that US-China tensions would not result in measures that would further darken the global economic outlook. Until such jitters can substantially subside, this added layer of uncertainty may well translate into choppy market conditions in the interim. Though in a twisted way, further escalation in US-China tensions that raises global recession risks may give central bankers cause to pause their aggressive policy tightening, in turn offering a measure of relief for risk assets.

Surprise OPEC+ output hike may weaken floor below oil prices

Brent futures are trying to hang on to the psychologically important $100/bbl handle this morning, as traders await the outcome of today’s OPEC+ meeting. It remains to be seen how the group will respond to President Biden’s plea to Saudi Arabia last month to loosen the oil taps. A surprise OPEC+ deal to ramp up production in September could see oil benchmarks falter and unwind more of their year-to-date gains, which currently exceed 30% each for Brent and WTI. An escalation in US-China tensions that further sours risk appetite should also weaken the floor below oil prices, amid persistent fears over a global recession.

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