Tit-For-Tat Trade War Goes Up a Gear

26/08/2019

We mentioned in last week’s ‘Week Ahead’ that the summer months can be deceiving with little in the way of risk events to get markets excited and moving. Last week was a perfect example, in fact Friday especially, as President Trump and trade tensions once again hit the markets in a big way with a significant escalation in the trade war.

Jerome Powell’s Jackson Hole speech was supposed to be the most important event of an otherwise quiet August day, but it did not quite work out that way. Not only did Powell’s speech barely make the top three events of the day, but other news flow resulted in a huge amount of volatility and one of the largest drops in stock markets this year.

Firstly, China shocked the markets by announcing that it would retaliate against the latest Trump trade moves by slapping 10% tariffs on another $75bn in US imports, which sent stocks sharply lower. Powell’s speech and remarks shortly after managed to stabilise sentiment somewhat as the Fed Chair didn’t reveal anything new with no mention of the ‘mid-cycle adjustment’. Stocks liked this perceived dovishness and managed to regain all losses.

Sadly, this didn’t last long as Trump came out firing firstly warning that he would strike back against China soon, while ordering US companies to find an ‘alternative’ to the country. He also slammed Chair Powell, effectively calling him an ‘enemy of the state’. 

The result was a strong move lower in risk assets with stocks plunging up to 3%, their third such drop in August.  Every sector was lower on huge volume and wide breath and futures are currently hovering around the widely watched 200-day moving average. Gold jumped higher hitting a six and half year high, but it was slightly surprising to see a fall in the greenback as the dollar index suffered it biggest one day drop in over a month.

After the official close on Friday, the newsflow continued with President Trump communicating that the US would be raising tariff rates on nearly all Chinese goods. At the G7 Summit he is then said to have had second thoughts on his actions, a statement which was later clarified as regretting not to have raised tariffs even more. 

It is certainly a volatile and baffling sequence of events but it raises the risk of an all-out economic war between the US and China. Significantly, USD/CNY has gapped higher this morning well above the 7.10 level with China seemingly reusing its tactic of allowing the yuan to weaken further, which hit its lowest level since early 2008.

That said, we have heard from the Chinese top negotiator and VP, Liu He, who has tried to calm tensions by calling for dialogue and firmly opposing the escalation of the trade war. This has seen USD/JPY move sharply higher from its low of 104.45 earlier in the Asian session. Markets will now focus on any further response by China to Friday's tariffs including the blaklisting of Huawei and any information about trade talks set to take place in September.  

We think it is instructive to highlight these events as subsequent moves and price action can be exacerbated in thin summer markets when traders are least expecting them, with volumes and the calendar light. It is extremely important to have good risk management processes in place as overall market sentiment is a key trading factor and short-term volatility is high.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.The trading of Foreign Exchange, and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Before deciding to trade forex, commodity or Index based CFDs you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that Capital Index (UK) Ltd is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters.