China's decision to retaliate to the US trade tariffs drags risk assets further to the downside prolonging the uncertainty around a potential resolution to the matter. The Asian side announced $60 billion of additional levies on US imports yesterday, which is only a fraction of the $200 billion US-led tariffs, but in any case further raises the stakes in this dispute. Safe havens continue to gain on the back of this development, with the Dollar higher against higher beta currencies but giving up ground versus the Yen and Gold. Equities were deep in the red with the US markets dropping between 2.4-3.4% while Europe was also lower by around 1.2%.
Further uncertainty on the back of China's retaliation to the US levies is forcing investors to go on full defensive mode. Safe haven assets gain as the 10-year US yields drop below 2.4%, reflecting market participants' worries about the potential knock on effect of this re-escalation. Growth on a global scale seemed to be pulling higher in recent weeks but Trump's decision to put more pressure on China is again dampening any early optimism. Granted, there is still about a month before the new tariffs come into effect but, with both sides now back in the trenches, the risk lies to the downside.
The Dollar dipped to 109 against the Yen yesterday but managed to recover some ground overnight; however, we now need to pay attention to the 109.80 support-turned-resistance, as a failure to climb above it again will validate the breakdown and point towards a deeper decline. The currency pair will take its cue from the equity markets: US futures are currently hinting on a marginally positive opening bell after yesterday's sell off but the next few sessions will be telling: will investors treat this deterioration as an opportunity to re-establish long positions, looking towards an eventually positive outcome or will they prefer to stay on the sidelines allowing the bears to steer equities lower?
The Euro and the Pound will come front and center today ahead of the ZEW Survey and UK employment figures. In regards to the shared currency, economists are expecting a positive printing to the report which should allow the Euro to remain above the 1.12 mark but the 1.1260 area is capping any upside potential in the near term. Should prices manage to overcome this level, then a move towards 1.1320 may be seen, otherwise a retreat towards 1.1180 should be next. Sterling on the other hand dropped below 1.30 again yesterday and today the currency is facing further downside risks: a bearish reading of the Average Weekly Earnings component will bode badly for Sterling and the next area of focus comes up at the 1.2920 mark.
Gold rallied above $1,290 yesterday when the Chinese side raised the stakes in the trade war with the US and imposed additional tariffs of their own to US imports. US Treasury yields edged below 2.4% for the first time since early April, which drove investors to look for refuge in the safe haven yellow metal, sending prices to the $1,300 mark. This is an important development as it nullifies the previous downtrend in place and suggests that we may see more gains for Gold in the near future. For this to take place, the key $1,300 resistance needs to be penetrated but if this happens, Gold could rally all the way to $1,325 over the next couple of weeks.
Oil briefly spiked to $63 but quickly retreated as China's decision to retaliate again threatens global productivity and demand for the black gold. Prices are now about to test the $60.50 support level, which is an important area: if Oil breaks below this then a deeper correction towards $58 may be seen, otherwise more consolidation between $60.50 and $63 will be the way forward.
Finally, equities were deep in the red yesterday as mentioned above but this morning futures in Europe and the US are pointing towards marginal gains. Investors seem to be hoping that US and China will be able to find their way back to the negotiating table before the G-20 meeting next month. Trump's recent tweets indicate that he's happy to play the waiting game, an approach akin to someone that believes he has the upper hand on the situation. As such, we should be prepared for a prolonged period of uncertainty in the near term with equities oscillating between gains and losses depending on fresh news and comments from either side of the dispute.
MARKET EVENTS TO WATCH
- UK Unemployment Rate - 12.30pm
- UK Average Weekly Earnings - 12.30pm
- German ZEW Survey Current Situation - 1pm
- German ZEW Survey Expectations - 1pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research