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Current Market Developments – USD Gains, Crude Oil Falls. Global Stocks Tumble

Volatility has been reawakened as escalation in US/China trade war tensions impacted global stock markets. US President Donald Trump released a list containing $200b worth of levies against China that if enacted, will slap tariffs on about half of goods the US imports from them. Since this news crossed the wires after Tuesday’s US session, the reaction came on Wednesday and it echoed into other assets.

BACKGROUND: A Brief History of Trade Wars, 1900-Present

The S&P 500 gapped down and finished the day 0.71% lower. The US Dollar, which acts as a safe-haven at times given its highly liquid status, surged higher as Wall Street tumbled. Keep in mind that prior to the US market open, the greenback was already somewhat elevated as benchmark indexes fell in Asia and Europe. The result was DXY’s largest daily gain since June 14 back when the ECB delivered a dovish rate decision.

Sentiment-linked currencies such as the Australian and New Zealand Dollars depreciated across the board. The Swiss Franc, another currency that tends to benefit when risk trends sour, appreciated. The Canadian Dollar initially got some upside traction as the BoC raised rates and still alluded to more hikes down the road. However, the gains in the US Dollar appeared too much and USD/CAD soon turned higher afterwards.

Meanwhile, crude oil prices plunged about 4.82 percent which was the weakest daily performance since May 2017. The commodity appeared more concerned about potential weakened demand given that trade wars threaten global growth. Oil completely brushed off the largest drop in weekly American crude inventories since 2016 (-12.63m).

A Look Ahead – Markets Still Vulnerable to Escalating Trade War Tensions if Calm Ensues

Thursday’s Asian trading session lacks market-moving economic events for the major currencies. As such, the already jolted indexes, will be vulnerable to ongoing developments in the US/China trade standoff. Earlier on Wednesday, reports crossed the wires that China could consider delaying merger approvals with US companies as a form of retaliation.

Official announcements may add fuel to the volatility in stock markets. Otherwise, a lack of updates could open the door for some consolidation. Given the anticipated retaliation from China, Donald Trump could respond with more tariff threats. Such an outcome could produce a similar reaction in the markets seen over the past 24 hours.

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Asia AM Digest: USD Up, Crude Oil Prices Fall. Stocks Vulnerable

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Asia AM Digest: USD Up, Crude Oil Prices Fall. Stocks Vulnerable

IG Client Sentiment Index Chart of the Day: USD/JPY

Asia AM Digest: USD Up, Crude Oil Prices Fall. Stocks Vulnerable

CLICK HERE to learn more about the IG Client Sentiment Index

Retail trader data shows 40.2% of USD/JPY traders are net-long with the ratio of traders short to long at 1.49 to 1. In fact, traders have remained net-short since Jun 28 when USD/JPY traded near 110.23; price has moved 1.4% higher since then. The number of traders net-long is 3.4% lower than yesterday and 5.3% lower from last week, while the number of traders net-short is 8.8% higher than yesterday and 9.6% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/JPY prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/JPY-bullish contrarian trading bias.

Five Things Traders are Reading:

  1. USD/JPY Jumps above 3 Yr Trendline, 112 on Strong US Inflation Data Tyler Yell, CMT, Forex Trading Instructor
  2. NATO Meeting Ends With US Allies Promise to Reach Spending Target by Peter Hanks, DailyFX Research Team
  3. Gold Prices Carve Fresh Bearish Sequence After Posting July-High by David Song, Currency Analyst
  4. DXY Index Surge Comes as Chinese Yuan Plunges by Christopher Vecchio, CFA, Senior Currency Strategist
  5. Bank of Canada Hikes Interest Rate to 1.50%, CAD Climbs in Responseby Peter Hanks, DailyFX Research Team

--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter