ASX investors may be close to scaling the COVID-19 wall of worry, but they won't have to wait long to hit the next obstacle.
The S&P/ASX 200 Index (Index:^AXJO) jumped 2% in morning trade as the ASX bank stocks led the charge yet again.
This takes the gain by the top 200 benchmark to around 30% since it hit its bear market trough two months ago.
This rally's no bull
There's a growing sense among professional investors that the rally isn't a dead cat bounce. While it isn't uncommon to see 20% odd jumps before a collapse during a bear market, it's unusual for the rebound to push into 30% plus territory. It would take one springy cat to pull that off.
I believe consensus is catching up to my view that I expressed on March 30 that the worst is likely over for the ASX 200 thanks to the government's JobKeeper program.
The last major bear stronghold (aka the big four ASX banks) is crumbling and this only adds to my conviction that financial markets have passed "peak-pain" – barring a second wave of infections.
Looming risks to the new bull market
But don't pop the champagne just yet. I don't think we have a clear run back to the pre-coronavirus top as there are other headwinds building on the immediate horizon.
One potential big obstacle is Hong Kong. The violent protests gripping the territory is shaping up to be a new battle front between US allies and China.
Investors aren't paying much attention to this looming threat as they are too caught up in the coronavirus afterparty, but this would be a mistake.
Why you should watch Hong Kong
US Secretary of State Mike Pompeo declared yesterday that the Asian financial hub no longer enjoys a high degree of autonomy from China.
This paves the way for the US government to remove Hong Kong's special trading status and to impose sanctions against key Chinese officials and freeze Chinese assets in the US.
Such a move would mark the biggest escalation in Sino-US relations since US President Donald Trump waged a trade war against the Asian giant.
Second trade war will be worse
The trade war put a big dent in our market before the COVID-19 pandemic dominated headlines. A second trade war that puts Hong-Kong in the middle of the battlefield will be far worse than the first, in my view.
This is because the first trade war was about economics and US politics. A potential second one will involve Chinese pride and I don't see the communist politburo compromising on this issue – not when Hong Kong symbolises China's humiliation at the hands of the West following the Opium Wars.
It's also alarming to see China flex its muscles on the world stage in other areas outside of Hong Kong. It's starting to act like a superpower and this leaves it little room to back down from challenges without looking weak.
You can bet that Australia will be caught in any crossfire as we are forced to pick a side.
But Trump may only be using Hong Kong as a leverage in the next round of trade tariff negotiations, so it's a little too early to assume the worse.
Debt time bomb
Trade wars aside, another wall of worry that the ASX 200 will need to scale is the expiration of goodwill and government stimulus in September.
This is when the JobKeeper and JobSeeker programs end. Landlords and lenders that have shown (or were forced to) restrain during the crisis might be more aggressively chasing debtors.
Even APRA is warning the banks that the worst lies ahead and not to take make a "dangerously naive" assumption of a "V" sharped economic recovery, according to the Australian Financial Review.
By all means, celebrate the flattening of the COVID-19 curve. Just remember to keep exuberance in-check.
