Risk appetite remains low as tariffs loom
Equity futures erased yesterday gains after President Trump did toughen its language on China, saying that China “broke the deal” the two countries have been working on for months. S&P 500 futures resumed downtrend and are currently testing the 2,862 support, which correspond to the low from Tuesday as well as its 50-day moving average. Across the Atlantic, the sentiment is not much better with the German DAX sliding another 0.65% to 12,100 points. The SMI gave up 1% as it reached 9,520 points.
In the FX market, investors fled risky currencies and bought safe-haven ones such as the Japanese yen – up 0.40% against the greenback with USD/JPY testing the 109.57 support (low from February 6th) – while the Swiss franc added 0.22% against the buck. USD/CHF erased yesterday gains as it slid toward 1.0180.
The single currency quickly fell to 1.1175 before climbing its way back toward 1.1190 as the risk sentiment stabilise. It has been a nerve-wracking week for investors as Trump kicked in the hornets’ nest last Sunday as he expressed his frustration with the negotiation process. We believe that strained market conditions will prevail for the rest of the week, as Chinese negotiators are expected to land in Washington on Friday.
JPY in demand as fears of trade war escalation rises
Threat of a trade war escalation is increasing, and manufacturers would most certainly pay the price. This is the case of Japan, which suffered the consequences of a sharp slowdown in exports to China from January to March 2019, putting quarter-on-quarter GDP 2019 most likely flat in 1Q 2019 (prior: 0.50%) when published on 20 May 2019. Yet considering the succession of natural disasters from July to September last year, the Japanese economy has remained solid with manufacturing activities maintained in expansion territory and strong consumer spending maintaining growth positive. However, the impact of an increase in tariffs on $200 billion in Chinese imports Friday would not bode well for Japanese suppliers of components and materials, which would face lower demand from Chinese producers of American finished products, ultimately affecting exports and putting downward pressure on the economy. In addition, a sustained rise in JPY would not help to improve competitiveness.
JPY is in great demand as suggested by USD/JPY 1 month at-the-money implied volatility, given highest since mid-January 2019. USD/JPY (-0.36% intraday) is turning neutral year-to-date and approaching support at 109.71 (25/03/2019 low). Currently trading at 109.75, the pair is expected to rebound, approaching 110.10 short-term.
