US-China trade tensions are expected to continue being the dominant theme this week, as Asian markets kicked off Monday in risk-off fashion. Except for the Japanese Yen, most Asian currencies are now weaker against the US Dollar. The Shanghai Composite Index opened 1.5 percent lower before paring losses at the time of writing, as most Asian equities also declined on Monday morning. Meanwhile, S&P500 futuresare now down one percent, potentially adding more pain to US stocks which last week saw their biggest weekly decline so far in 2019.
Over the weekend, US President Donald Trump offered mixed signals regarding his approach to trade negotiations with China. On one hand, he tweeted that talks will continue in a ‘congenial’ manner, with ‘absolutely no need to rush’. On the other hand, he also said he loves ‘collecting big tariffs’ and told China to ‘act now’. The tweets came amid reports that US trade negotiators gave their Chinese counterparts a one-month deadline to reach an accord or risk having US tariffs imposed on all Chinese imports.
Markets’ base case on shifting sands?
Given Trump’s unpredictability, attempts to predict the end result of US-China trade talks risk placing any base case on shifting sands. At the time of writing, markets are still waiting for details on China’s ‘countermeasures’ to the higher US tariffs imposed on the $200 billion worth of Chinese goods on May 10. Keep in mind that President Trump has also cited the possibility of a 25 percent tariffon a further $325 billion of Chinese goods that are currently tariff-less. While it appears that some market participants are still holding out for some form of a formalized US-China trade deal, last week’s selloff from risk assets could set markets up for more trade-related volatility ahead.
Potential deviations for US, China economic trajectories may add to market uncertainty
Besides commentary from either government on the trade front, investors will also keep a close eye on major economic indicators out of both the US and China this week. The respective sets of industrial production and retail sales data out of both countries are due Wednesday, set against the backdrop of re-emerging tensions between the world’s two largest economies. The US economic growth momentum is expected to remain steady, while China has been showing signs of stabilizing in recent months; any significant deviation from those trajectories may add another layer of uncertainty to markets.
Safe havens strengthen as Trump tells China to ‘act now’
While Trump has asked China to ‘act now’, investors didn’t have to wait for such a call from the US President before taking risk off the table. Gold is now holding around the mid $1,280 while the Japanese Yen is strengthening, with USDJPY falling further below the 110 level. Meanwhile, the Dollar Index (DXY) is steadying around the 97.3 level at the time of writing, having wrapped up two straight weeks of declines.
A lack of progress in the US-China trade impasse should create a supportive environment for safe haven assets, while a major deterioration in tensions could see a major upwards move for the likes of Bullion and JPY.
