- Stocks fall, yen soars as Trump hints at new tariffs
- Dollar retreats after jobs data, but trade concerns provide support
- Sterling rebounds amid hopes for Brexit progress
Trump warns of new tariffs on China, dents risk appetite
Risk aversion is the name of the game on Monday, with investors diverting funds away from riskier assets like stocks and towards safe havens such as the Japanese yen, amid fears that the US-China trade conflict is ready to re-escalate. President Trump said over the weekend that he is going to raise tariffs on $200bn of Chinese goods to 25%, from 10% currently, and that he will impose new levies on another $325bn worth of products ‘shortly’.
This is a major turnaround, as the popular narrative until now was that an accord is practically a done deal following months of optimistic rhetoric on both sides. Indeed, the market reaction was severe, with Chinese stocks falling by more than 5%, while futures tracking US indices like the S&P 500 are also pointing to a 2% lower open today. In the FX spectrum, the yen is outperforming while commodity currencies like the aussie and the kiwi are on the back foot.
Overall, a deal still seems more likely than not, though uncertainty has clearly returned and risk aversion may linger for a while. Trump wants to score a victory and wrap this up before the 2020 election race, while also boosting the stock market, so an agreement is still the most likely conclusion. However, the US President seems to be reverting back to his original methods of ratcheting up pressure first to generate negotiating leverage, implying that things could get worse before they get better from here.
Dollar retreats, but trade fears provide support
The US dollar pulled back on Friday, even despite another set of solid US employment data. Nonfarm payrolls rose by 263k in April, much more than the anticipated 180k, while the unemployment rate unexpectedly declined. The disappointing spot was wage growth, which held steady at 3.2% in yearly terms, missing the forecast for an acceleration to 3.3%.
The dollar tumbled immediately as investors tend to focus more on wage growth, and continued even lower after a disappointing ISM non-manufacturing PMI and some cautious-sounding remarks by Fed officials. As a result, the market probability for a Fed rate cut this year rose back up, yet the dollar is trading nearly unchanged against a basket of currencies on Monday. Renewed trade uncertainty seems to be fueling demand for the world’s reserve currency; recall that the greenback was the market’s favorite haven asset as tensions escalated last year.
Sterling roars back on hopes for Tory-Labour deal
The British pound soared across the board on Friday amid growing hopes that the nation’s two biggest political parties could reach an agreement soon to break the Brexit stalemate.
The latest headlines suggest that both the government and Labour are ready to compromise on a customs union arrangement, which would remove the need for the Irish backstop and therefore allow Brexit to move forward. Any official confirmation of that could be positive for the pound as uncertainty would fade and the risk of a no-deal may diminish. That said, downside risks still linger, with the most prominent one being the Tories replacing Theresa May with a hardline Brexiteer.
