Uncertainty and confusion around a trade war are slowly but surely leading the markets down the road to financial horror. Global equity markets continue to fray at the edges on the streams of negative headlines and none more so damning than a report from a Chinese government think tank.
The leaked note warned a further escalation could lead to ” financial panic ” on the mainland and of course the fear is that contagion could spill over from the world’s second-largest economy at a time when significant economies outside of the US are struggling on the economic front and raises the specter of more dynamic PBoC policy adjustments. All the while the market is voting that China will be the ultimate loser in this protracted game of high stakes poker.
On the US markets, stocks closed lower as confusion reigns over the US administration trade policy. Wall Street started in positive territory as President Donald Trump walked back a previously announced plan to impose limits on Chinese investment in American technology companies only to see gains evaporate after Larry Kudlow, director of the National Economic Council, said in an interview that the Trump administration wasn’t softening its stance on imposing limits on Chinese investments.
If the administration doesn’t understand what the President is trying to achieve from his trade policy, that is hardly a sign of confidence for investors. It would be entirely natural if investors were a bit confused as indeed confusion reigns supreme. And for traders hoping to take a summer vacation, there is no rest for the weary.
Oil market
The US benchmark settled as its highest prices since 2014 fueled too by a considerable plunge in US inventories. Oil production was flat at 10.9 million barrels per day last week, according to the Energy Information Administration. US crude oil exports jumped 626,000 bpd to an eye-watering 3.00 mmbpd. Indeed, the massive $11 Brent-WTI spread in early June was probably a significant factor in the jump in exports.
This data comes on the back of a bullish spike after the US called on their allies to adhere to a zero tolerance on Iran imports. The US administration is wielding a huge stick on the trade war front, and its expect this compliance will adhere for fear of more US corporate reprisals.
All the while, supplies will continue to run tight in North America as the shutdowns of the essential Syncrude oil sand facility will keep 350,000 barrels per day offline at least until the end of July. And without question, the markets are bedevilled again by enormous supply uncertainties.
The oil bulls are back in charge.
Gold Market
Gold prices went in the tank again as investors continue to pile into the havenUS dollar to buy US bonds, and the surging greenback is tarnishing gold's appeal. The yield on 10-year Treasuries fell to 2.83% as investors view US government debt as the place to ride out escalating trade disputes which continue to send jitters through global capital markets. While shaky global markets make gold look attractive, there is no escaping the massive bearish risk for a stronger USD.
Currency Market
EUR: Political fissures around migration see the EUR trading on shaky ground. Continued political risk and negative differentials to the EUR should see the euro move. Short EURJPY should continue to look fruitful, especially if we get a severe case of the risk wobbles which could trigger some JPY buying on safe haven demand.
AUD: Even if the China markets have a mild case of the sniffles, AUD traders will take notice. But if the China markets are indeed on the cusp of "financial panic," it should be all in short on G-10 primary China proxy.
MYR: With the USDCNH breaching fresh highs the USDMYR continues trading higher in sympathy with the yuan weakness. The overnight headlines of the Chinese think tank have local investors extremely concerned. And with the US dollar reasserting itself as the unquestionable hedge against escalating trade war, there’s no escaping the wrath of a stronger USD. With a surging USD and prospect of escalating trade war, indeed the path of least resistance appears higher with the next key focus on 4.05 USDMYR.