China, the world’s second-largest economy behind the U.S., is set to reopen in just a few days and one major Wall Street firm has boiled down the likely impact on financial markets.
In a note released on Friday, Dominic Wilson and Vickie Chang of Goldman Sachs produced a chart in which they lay out all the ways in which currencies, equities and the bond market could react. In particular, they see the likelihood that China’s faster-than-expected Jan. 8 reopening will lead to a weaker greenback relative to commodity-linked currencies, to rising copper and crude oil prices, and to somewhat higher Treasury yields.
“There is still room for China-sensitive assets to move further so long as the path to reopening remains clear. China/EM [emerging-market] equities, copper, and commodity-linked FX still broadly appear to be the biggest beneficiaries,” they wrote. “The shifting correlation patterns from a response to China reopening—potentially higher DM [developed-market] yields alongside a weaker USD [U.S. dollar], potential for a stronger JPY [yen] alongside stronger Japanese equities—offer ways of exploring additional leverage.”
China’s reopening has the potential to jolt financial markets in ways that haven’t yet been fully contemplated by investors and traders. As of Friday, for example, U.S. markets remained more focused on domestic data pointing to easing wage growth and broadening weakness in the economy.
Treasury yields plummeted across the spectrum in response, led by the three-year rate
and all three major U.S. stock indexes
rallied on hopes that the Federal Reserve will eventually pivot away from its rate-hike campaign.