Talking Points:
- Weekend exports from Bloomberg and WSJ warned US authorities would soon restrict Chinese investment in its tech sector
- Refutes and half clarifications from the US Treasury Secretary only worsened the global implications
- European political risks, Brexit and other themes may compete with trade wars; but true risk aversion would supersede all
Trade Wars Intensify, Spot the Global Angle
As if the heat under global trade wars wasn't enough to close out this past week, headlines over the weekend added further pressure to strained confidence to send risk trends reeling Monday. Through last week, the steady escalation between the United States and China in their unmistakable economic skirmish had ended without relief from its ever-greater peak. US President Donald Trump held the last move with his threat to push the import tax bill on Chinese goods to $200 billion. Negotiations had reportedly stalled with US officials contemplating whether to come back to the table to once again come to common ground as the President continued to create tremors beneath the discussions. Then, with the picture already laden with uncertainty, reports were released by news agencies Bloomberg and the Wall Street Journal quoting sources in the discussions that suggested the United States preparing to further announce curbs on Chinese investment in the US technology sector and to restrict certain exports to the country. Treasury Secretary Steve Mnuchin responded to the stories on behalf of the President to suggest the news was inaccurate; but not because this policy was soon at hand, but rather what policy may come would not be restricted to China. That does not ease the threat, rather it broadens it. Just as the Friday threat to implement a 20 percent auto tax on European cars widens the front on the global trade war.
USD/CNH Daily Chart
Risk Trends Respond More Clearly
Trade wars are not exactly new at this point, as the threats and actions have built traction for some months now. However, it seems we are reaching another point where the situation is once again exacting influence on speculative sentiment. Risk trends were clearly under pressure Monday with a wide correlation across assets that have a connection to wax and wane of speculative appetite along with a notable jump in intensity. Global equity indices registered some of the most intense pain. Asian markets saw substantial selling, but the European indices from DAX to FTSE MIB to the UK FTSE 100 suffered some of the heaviest selling. That fits the carry over risk from last week's headlines where Trump levied such a hefty threat against the European auto industry. With emerging markets, junk bonds, commodities and other group feeling the weight; the US equities market took up the bearish call to register their own milestones. The Dow quickly brought an end to a very tepid recovery and closed a ninth loss in 10 trading days - showing Friday's break to merely match the worst bear run in 34 years was merely technicality rather than conviction. The benchmark would also move the pressure of a 200-day moving average break to the forefront. But signaling the particulars of a complicated fundamental theme, the tech-heavy Nasdaq suffered a sharp loss against a backdrop of unique persistence. Pushing the standoff between the US and China into the technology arena where speculative performance has led, risks undermining the torchbearer for speculative confidence and permanently reversing course on investor sentiment.
Dow Jones Industrial Average Daily Chart
The Dollar and Euro Defy Convention
While much of the focus for the grand battle being played out on the global stage holds with China and the United States, it is the global implications and the developed world impact that poses the greatest risks to stability and growth. With the new breakout between the US and EU specifically so far unresolved and poorly defined, it was somewhat surprising to see EURUSD break conventional as a pair and through its individual components. This benchmark currency cross advanced for a third consecutive session, defying the response expected from 'instigator' and 'retaliator' relationship established between USDCNH. Given that deviation, it shouldn't come as a surprise that the trade-weighted (read EURUSD-heavy) DXY index sank for a third consecutive session. However, when we water down the influence of that particular pair; an equally-weighted USD index shows the currency has in fact thus far held high level former resistance as support. Does this speak to a relationship whereby the Greenback is at risk of a global reprisal or that is somehow benefits from being the driver? Further intensity behind this fundamental theme is likely to render a verdict.
EUR/USD Daily Chart
Finding Opportunities Outside the Gravity of Trade Wars
When risk aversion sweeps through the market, there are few corners of the financial system that can avoid the avalanche. That is the universal scope through which trade wars can reach stretch to cover the globe. In turn, to avoid the influence of the catalyst and its full impact can prove difficult. In the event of true and pervasive risk aversion, seeking exposure outside of the current is exceptionally low probability. However, before the market reaches an all-consuming focus on the outbound tide of speculative interest, there will be a transitional period where more disconnected assets can still deviate from the underlying drive. For the likes of the Australian Dollar, connections through risk trends, trade wars and direct link to China make for multiple points of connection that make it more sensitive. However, for currencies like the Swiss franc and Canadian dollar, there is certainly a safe haven and NAFTA-based trade war element respectively. Yet, those connections don't seem strong enough to keep the currencies in the underlying course decided by trade wars. In particular CADCHF shows persistent strong movement that may expose the individual currencies and pair to speculative excess. Oil recently driven by OPEC production news is similarly put to the test of trade war's influence on demand and its general influence through risk trends. The rally Friday and mute retreat of late defy expectations. We discuss all of this and more in today's Trading Video.
CAD/CHF Daily Chart
If you would like to download the 'Manic-Crisis Calendar' I refer to regularly in my videos and webinars, you can find it here.
--- Written by John Kicklighter, Chief Currency Strategist for DailyFX.com
To contact John, use the comments section below or @johnkicklighter on Twitter
