Trade War Escalation
That was quick and sudden and reminding us just how quickly things can get right out of hand. On the back of Secretary of State Mike Pompeo mincing few words by branding China’s openness and globalization as a joke, President Trump has asked the USTR to identify $200B in China goods for other tariffs at a rate of 10% and will up the stakes to $400B if China retaliates.
Indeed, this is moving beyond ” tit for tat ” levels, and predictably, investors are running for cover under the haven umbrellas as global equity indices are crumbling under the weight of an escalating trade war. What was a mild risk-off tone at the end of the NY session is threatening to morph into a full-blown rout in global equity markets. It’s amazing how quickly the tides can shift as only hours ago the market seemed to be backing off the worst of trade war concerns, and to shift into a full panic mode.
All bets are off on this one!!! Buckle up as this could get messy.
World Cup effect weighing on volumes
Volumes are running low confirming the World Cup effect, but the lack of any substantial data has also contributed to the downturn in volume.
Equity Market
Risk-off sentiment continues to dog equity markets as heightened trade tension between China and the US have investors yet again bracing for the worst as a full-blown trade war were to materialize it would have negative impacts on the US economy. But with US market trading off session lows, the start of the week would be better characterized as a case of investor jitters rather than a full-blown risk-off move.
Oil Market
Elsewhere in oil, with the OPEC meeting looming on Friday, the headline procession marches on. Despite a likely veto from Iran to block the Vienna group production rises, most OPEC members are optimistic the group can agree on a production hike. The oil complex has bounced back from Friday weakness as overnight headlines are now pointing to 300,000 and 600,000 barrels a day production hike. While much less than feared, and closer to my desk consensus, the figure excludes non-OPEC producer Russia, so the effective increase in supply could be 0.2-0.3 mmbpd more. This supports our long-held view that we will likely see a compromise which should set the stage for gradual barrels added over time, which is likely to be endorsed by most. This approach makes logical sense as a fine-tuning approach will ultimately keep both end users and producer happy.
Gold market
Despite bouncing slightly overnight the precious complex is again giving in to the dollar strength. Despite tentatively recouping some of Friday loses, gold remains under pressure from the prospects of a strengthening dollar. Also, after Friday’s stinging 2% + sell-off, the gold complex remains extremely vulnerable to more long liquidation, from a technical perspective,
Currency Market
Not everyone is as bearish as me on the euro but, it remains a complete mystery why the ECB decided to kick the rate hike can down the road for another 15 months, even more so as ECB’s Vasiliauskas (member of the governing council) said that he sees ‘no clouds’ for the euro area in the medium term. Thus, the market will be focusing on Mario Draghi's conference in Sintra for a convincingly dovish follow-up before sticking the fork in the euro
While lower remains the apparent near-term path of least resistance for the euro, over the medium term however the vast interest rate differential will likely narrow while the uncertainty around trade wars and the demise of the US influence on global trade as China continues to assert its position, should ultimately prove detrimental for the dollar in the long run.
Asia FX
Asia FX continues to struggle and look to be extremely vulnerable. Outflows continue to pick up momentum as investor angst over trade war and policy divergence remains front and center as investors remain extremely cautious about re-engaging risk.
MYR: The ringgit tested the critical USDMYR level. And while trading a negative correlation to local risk, the moves have been less harmful perhaps reflecting that despite the political noise, the MYR remain less vulnerable to external trade shocks and a stronger USD than its regional peers.