Not entirely unexpected, President Trump is looking to thwack China with the $200 billion in tariff as early as next week. Equities have predictably taken it on the chin as the market has that distinct taste of risk off. But this reaction is likely magnified by weekend profit taking and the emerging market tumult that continues to weigh on overall sentiment.
While a reality check for some, the pessimist in me was still expecting this level of trade escalation given that the administration will not give up on their view that China is a currency manipulator. However, the optimist in me suggests this may be little more than another in a long line of a friend of foe psychological tactics that the President is well known to use. Indeed, the markets are a bit discouraged, but we are far from meltdown status as investor and traders alike consider all possibilities.
Im not even going to touch Trump's WTO threat to pull out of the organisation.
Asia Equity Markets
We should expect some losses on the back of the latest China trade headlines, but with US markets not overly de-risking, the sell-off may not be that deep. After all the escalation is not that unexpected
Oil Markets
Oil markets are being pressured a tad by a stronger dollar and little sign of progress on the USD-China trade front. But there remains that underbelly of support from inventory reports that showed declines in US and Antwerp crude. Despite the unnerving prospects of the trade war escalation, dips are being supported as the impact of US sanctions on Iran is still dominating views encouraging traders to stay long. And while OPEC and their allies are thought to be in the process of agreeing to a price stability pact, there’s enough doubt and scepticism on oil trading desks that the extra supplies will not offset the demise of Iranian output.
Gold Prices
Gold continues to be Mr Irrelevant when it comes to a go-to risk hedge. No bid on the Trump tariff headline and nary a look from hedgers on the recent emerging markets tumult. With the Feds on the move and real yields moving higher, investors prefer the umbrella of US treasuries to sit out the storm. Gold remains on the outside looking in.
Currency Markets
Predictably the yuan finds itself at ground zero once again. Smart money has positioned long USD/CNH early in the week and heading into today’s key China PMI later in the session there is the real possibility we could be in for a decent wave of volatility. I’ll issue some views on the release.
Assuming the line in the sand for the Pboc is 6.90, we should expect longs to reduce positions if we push higher on a negative PMI.
The antipodeans are looking oh so shaky.
The Kiwi is G-10’s latest whipping boy, and sentiment soured further on today Fonterra auction, but the ANZ August consumer sentiment came in close to expectation and triggered some profit-taking. I don’t think the market is looking to extend any downside risk ahead of the weekend, so we could see more profit taking as the session wears on.
Housing market concerns and political turbulence should keep the pressure on the Aussie.
Westpac adjusting their variable mortgage rates higher due to funding costs abrading margins does raise the spectre of mortgage defaults, and one would assume the RBA is less than happy. I expect Westpac rivals to follow so this could get interesting as it may cause another negative repricing of RBA policy.
We’re certainly on the edge of a slippery slope amid this bearish Aussie backdrop with a brewing political hotpot threatening a cherished AAA sovereign rating, but the RBA will ultimately struggle to hold their neutral tilt should any signs of housing meltdown materialise.
The lira has traded poorly throughout the NY session on and was basted after yet to be confirmed report that the deputy Central Bank Governor has resigned to join the Development Bank of Turkey. Indeed, when it rains, it pours.
The Argentina markets are a "Messi” and with the Central bank falling on the sword and hiking the repo rates to an ungodly 60% while digging into their reserves in an attempt to add some modicum of stability. In my view, nothing good ever comes from aggressive intervention. A short-term reprieve allows traders to short at better levels.