Daily Market Commentary 23rd July 2020

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The EUR$750 Billion EU recovery fund was a boon to markets and provided the necessary stimulus to the virus-damaged EU member economies. The problems arise in the funding and liability of the debt. The EU has gone against their own rules and principles, making wealthier nations responsible for the debt of the more financially challenged, Southern and Eastern Nations. The collective responsibility of debt changes the whole concept of the EU and promises to complete change in the model. The EUR rose up to 1.1560, while the GBP traded 1.2730, boosted by British virus vaccine advances.

The ‘second wave’ of virus infections, swamping the ‘sun belt’ US States, are a concern to markets and the re-opening of their economy. To balance these fears are the developments in the search for a vaccine and treatments. The US Government has pledged $2 Billion in support to the companies developing the vaccines. The US Government has also escalated tensions with China, ordering the closure of the Chinese Consulate in Houston, Texas. The dramatic move was in response to the crises of IP theft and drew a quick response from the CCP, promising severe retaliation. The aggressive Chinese Geo-Political behaviour is drawing increasing responses from the US and their allies. US Secretary of State Pompeo, has been in the UK, formulating concerted actions against the Chinese. The Australian Government has been increasing their response to Chinese aggression and these countries may increasingly bring pressure to bear on the Chinese Communist Party?

These escalating tension could spill over into global trade and disrupt the existing supply chain. This is the big threat to the trade exposed Australian and NZ economies, whose dependence on China has risen to dangerous levels. The currencies shrugged off the worries, with the AUD trading 0.7130, while the NZD pushed up towards 0.6650. These currencies are reaching pre-pandemic highs, as a result of the easing reserve, plus the perceived success in combatting the pandemic. Rising tensions are a threat to vulnerable economies and currencies. The recent RBA minutes affirms the credibility of the RBA, one of the few Central Banks to hold to traditional monetary policy precedents.

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