China is not backing down, and why should they?
A confluence of market ruinous variables has triggered the intersection of short, medium and long-term investors who are taking for the sideline for fear of a market trainwreck.
US equity markets tumbled overnight as investors headed for the relative safety of Bonds as the US is on the cusp of a full-blown trade war with China. And with China unlikely to back down and to readying the retaliatory tariff salvos, markets are looking immensely fragile today. Strap in as a tit for tat tariff tiff is about to start.
Fortunately for the US, however, US bond markets remain the only game in the town for China, and while the may use pulling out of US bond markets as a lever in the trade war, it’s implausible they will follow through for fear of irreparably eroding the values of their enormous US holdings.
But the global economy is also looking incredibly more brittle this morning in the wake of the disappointing Eurozone, German and France PMIs, so this data also explains some of the market jitters.
Trump’s revolving door remains in full swing as John Dowd, Donald Trump’s lead lawyer and ‘strongman’in the Mueller investigation into Russian election interference handed in his walking papers after the President is purportedly turning to Fox news for legal advice. The president’s erratic nature continues to generate credibility issues. But it doesn’t stop there as General McMaster was also handed his marching orders today.
The Facebook data controversy is showing few signs of abating and continues to have far-reaching implication not only for the social network but the tech sector in general.
All this has translated into a massive risk-off correction with steep falls in global equity markets and broader USD strength as investors head for the safety of US bonds.
Finally, the storm called ‘Daniels ‘is expected to hit landfall on Sunday night. CBS has announced they will air a telltale highlighting Porn Star ‘Stormy Daniels ‘infidelities with President Trump. While probably more tabloid fodder than anything else, nasty sex scandals have had a negative influence on past presidents approval ratings. But given GOP strongholds in the Bible Belt, these revelations could be particularly damaging to the GOP.
Currency Markets
While traders were debating the level of FOMC hawkishness after ‘Jittery Jay’nudged the longer term FOMC dots higher, they were utterly overwhelmed by risk aversion and all but gave up on the currency strategy and followed the flow.
If pressed for a view, short USDJPY continues to be the easiest and quickest road to the bank. But despite the dollar gaining some momentum vs the broader G-10 landscape, the continuation of easy money policy and the Fed turtling on 2018 monetary policy adjustments is a nasty cocktail and should lead to the resumption of more widespread dollar weakness over the short term.
The Japanese Yen
The Yen continues to be the beneficiary of global risk aversion, and even as we melt through the 105 level like a hot knife through butter, there remain very few reasons not to be short USDJPY in this environment. Normally crowded trades get worrisome entering a weekend, but the USDJPY traders are on autopilot this morning.
The Euro
The Euro is being weighted down by the general risk-off malaise but is having just as much trouble regaining composure after the downtrodden EU PMI prints.
The Malaysian Ringgit
With a possible escalation of a trade war between China and the USA is denting regionals sentiment. Buckle in as there will be some short-term pain given the enormous export-oriented nature of the regional economies .. And while Malaysia is nowhere near as dependent on US exports as other regional currencies, it will be difficult to avoid the short-term fall out from a local association perspective. But the far more reaching implications for regional currency markets is that this could lead to the markets pricing out future rate hike premiums and in some cases, moving to rate cut probabilities.
Given the massive wave of risk aversion gripping markets, I would expect the USDMYR, considered a riskier currency, to gravitate towards the higher end of the current range.
Oil Markets
Oil prices are coming off pressured by US production and the waves of risk aversion cratering equity market;
Also weaker data out of Europe and the real prospect of a trade war will weigh on global growth sentiment.
Traders are looking over their shoulder at the worrying signs from the industrial commodity complex which is plunging on a shaky global growth narrative, something that certainly doesn’t bode well for oil producers either.
Gold Markets
We’re in a flat our risk-averse mode with looming trade wars pressuring global equity markets and providing a fillip to gold prices as investors are rotating out of equity positions into Gold. However, the USD remains on edge but tentatively holding up against the broader G-10 complex ( outside of JPY ) which is keeping top side Gold momentum in check so far.
