Monday, August 12, 2019

“Trade war talks? If we don’t talk, that’s fine.” Trump stands firm in trade war with China, but is Europe heading for a crisis?

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Market recap: Trump remains confident as the trade war with China escalates

It was a mixed opening for stocks in Asia, with Sydney opening lower while Shanghai, Hong Kong and Seoul opened higher. Trading was limited as Japan, Singapore, India and Malaysia’s market were closed yesterday. The Chinese yuan’s reference rate from the People’s Bank of China was fixed at 7.0211, slightly lowered than that on Friday.

The US vs China trade war shows no signs of letting up, with Trump delivering a strong speech claiming trade talks could be cancelled. “We’ll see whether or not we keep our meeting in September,” said Trump. “If we do, that’s fine; if we don’t, that’s fine”. Trump added that the US would continue to refrain from doing business with Huawei, as its temporary license from the US will expire on August 19th. In addition, he also applied pressure again to the Fed to lower its rate. He acknowledged he won’t devalue the dollar and would like to see a full-point rate cut which will automatically bring down the currency.

Safe-haven assets such as gold, silver and the Japanese yen surged last Friday, with the dollar falling against most of its G10 peers. The DJIA fell 0.34% to 26,287.44, the S&P 500 shed 0.66% to 2,918.65 and the Nasdaq lost 1% to 7,959.14. As we predicted in our report published last week, Uber Technologies shed 6.8% after reporting a record US$5.2 billion quarterly loss and lower-than expected revenue.

Chart 1: Uber H1 (Source: ADSS MT4 Platform)

Today’s analysis: Europe’s problems continue to grow in 2019

The market spotlight was always going to be on the US and China last week, but it was actually Europe’s economy that was worth monitoring. With the release of key economic figures week, there’s much talk concerning the three largest economies in Europe.

Germany is the largest economy in the Eurozone, but its export-oriented and manufacturing-oriented economy appears to be a major victim of the trade war. Last Wednesday, Germany revealed its industrial production declined 1.5% month-on-month. In June, the industrial production of Q2 dropped 1.9% quarter-on-quarter - the largest quarterly decline since Europe’s debt financial crisis in 2012.

Even though the UK is not in the Eurozone and their new PM Boris Johnson is looking for a close trade relationship with the US after Brexit, its economy has already suffered because of the trade war. The UK economy fell for the first time since last 2012, as its Q2 GDP reportedly fell 1.2% year-on-year with a reduction of 0.2% quarterly. Manufacturing was the biggest contributor, slipping 2.3% quarter-on-quarter in the three months to June. That figure was the biggest quarterly fall since the first three months of 2009. Sterling dropped to its lowest rate against the dollar in 31 months and reached down to 1.2’s level, a level last seen after the Brexit referendum result was announced.

Italy, the third largest economy in the Eurozone, is facing political uncertainty over the leader of the ruling League Party, Matteo Salvini, who has called for a no-confidence vote against the country’s government, meaning a new general election is on the cards. This bombshell sent a further depression to the market, as Italy’s government and the EU have been working for so long in a bid to come to a compromise regarding its annual budget. This process would become redundant should the government break down in Italy, while the debt ratio and budget agreement between Rome and Brussels will still be one of Europe’s main concerns.

The economic calendar spotlights this week will be on Europe, as vital economic figures will be released, including the German CPI for July, Germany’s Q2 GDP, the UK’s CPI, and more. It is expected that as the trade war situation worsens, along with the global economic outlook, the European economy is expected to shrink.

The European Central Bank (ECB) will very likely cut rates in September to ease economic pressures, although it’s looking more likely that it can’t stop a recession caused by the trade war, future worries over Brexit and Italy’s political problem. Euro and sterling are expected to fall again this week.

Overall, the European economy is expected to face more issues by the end of 2019.