Harrison: U.S.-China Relations Will Put a Headwind on Risk Assets

Your Real Vision Daily Briefing for May 29, 2020

Ash Bennington joins Ed Harrison to discuss the latest developments in markets and macro in the era of coronavirus.

  • Markets reacted positively to the news of Trump’s call to strip Hong Kong of its special trade status but it’s likely that the escalation of tensions will ultimately be negative for growth.
  • This could be the nail in the coffin for Hong Kong as a financial center in Asia; the banking center could move to mainland China and increase its sphere of influence in the region.
  • Debt levels in the developed world are such that the most likely place we’ll see real growth going forward is in emerging markets, but it is not easy to pick which countries will be winners.

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President Trump’s call to revoke Hong Kong’s special trade status could have ripple effects that will impair growth and put additional risk on the table because of social and political instability, Ed Harrison told Real Vision during today’s Daily Briefing.

Harrison said that while the markets reacted positively to the news today, the cold war of sorts between the U.S. and China will ultimately be negative for growth and put a headwind on risk assets.

He also said that stripping Hong Kong of its status could threaten its position as a major financial center in Asia and as a result, international capital flows will go to other markets. Harrison thinks the banking center could move to mainland China, and if that happens, China could develop a sphere of influence in the area like the U.S. has in the Americas.

“That is a potential outcome from this new cold war that is happening,” he said. “Nothing is off the table and there’s a lot of volatility in the geopolitical situation going forward.”

As for where growth will come from going forward, Harrison said he expects significant deleveraging and slow growth from Europe and the U.S. That leaves emerging markets to create growth in this environment, but while Harrison said he knows which countries not to bet on (South Africa, Turkey, Argentina), it is difficult to guess which countries will come out better on the other side.