US stocks are poised to open lower after China methodically announces fresh retaliatory tariff threats. Over the weekend, China released a government policy paper that suggested a willingness to return to negotiations, while be highly critical of the Trump administration’s tactics with tariffs and blaming them for talks falling apart. China also issued a warning to students of the risks of receiving US education. China plays a prominent role with education in sheer numbers and top talent. China also opened a probe against FedEx for wrongful deliveries of items, possibly targeting packages that were supposed to arrive at Huawei. It seems China is tightening the screws on their retaliatory measures, expecting the US will cave in offering concessions and removal of additional tariffs if we see further damage to the US economy and stock market.
Last week, markets were surprised by President Trump’s surprise announcement that US will unleash tariffs on their southern neighbor. Mexico sent a delegation to the US to review immigration issues, this followed their immediate retaliatory tariff threat. Mexico Foreign Minister noted the Mexican government is following its laws on immigration, while their ambassador to the US added because of Mexico 250,000 migrants did not arrive to the US. Mexico remains committed to working with the US but are threatening the migrant situation would be much worse without their help. The US should be able to resolve the spat with Mexico, but that will likely not provide much relief to markets, since China remains the key roadblock for global growth.
USD
American growth is not invulnerable to this trade war and we are starting to see dollar weakness here. The Federal Reserve is also highly expected to deliver rate cuts as Treasury yields continue to slide. The dollar is lower across its all of its major trading partners except for the British pound. The dollar index reached a fresh 2019 at the end of last week, but it seems we are in the midst of a pullback. All eyes will be on the US Manufacturing data this morning.
GBP
The British pound was softer after the May manufacturing reading delivered its first contraction in 34 months. New orders also dropped sharply, but this followed heavy stockpiling ahead of the March 29th date that Britain was initially expected to leave the EU.
President Trump is in London for a three-day visit, and while nothing of substance is expected out of his visit, it will make for entertaining optics if he meets with Boris Johnson or Nigel Farage.
Oil
Crude prices got pummeled last month, the worst May performance in seven years, as trade war escalation dealt a strong blow to global growth and safe-haven demand saw Treasuries soar, driving the dollar higher. Oil prices are rallying today on mainly a slightly softer dollar and on Saudi energy minister Al-Falih assured markets that OPEC + will continue to stabilize the market beyond June and that the recent selloff was unwarranted. West Texas Intermediate crude is higher by 2% and Brent crude is 1.3% higher in early trade.
Gold
Gold is breaking out higher as downbeat expectations for global growth have investors searching for safe-havens. The yellow metal underperformed last month against other safe-haven trades and the climb above $1,3000 an ounce is attracting many technical traders. If trade tensions continue to heighten globally and we do not see an immediate reason suddenly be optimistic on the trade front, bullion could look to attempt to reach the 2019 high of $1,349.80 an ounce.
