Markets are still reacting to the deterioration in the US/China trade dispute. Has the driven a sustainable shift in market sentiment and how is it impacting on forex, equities and commodities? What are the key market drivers for this week?
Last week, Donald Trump induced a tailspin of fear. After months of supposed progress towards agreement, Trump tweeted about slapping increased tariffs on Chinese imports. China had backtracked on agreements made as part of a prospective trade deal. Reneging on swathes of previously agreed binding commitments being written into law, suddenly the US would have to “trust” China to comply. US negotiators balked at the prospect and subsequently the US has increased tariffs on $200bn of Chinese imports from 10% to 25%, enacting a previous threat that had been deferred in January. In Q1, US GDP was boosted by stockpiling , with export orders brought forward for tariffs that were not imposed. However, with tariffs now in place it could now mean a sharper deterioration in the trade balance, widening the current account deficit and a negative impact on GDP. Trump says “there is no need to rush” the talks, whilst a conciliatory letter from President Xi of China has helped to sooth market fear. The door is open for talks whilst tariffs will not actually hit goods shipped now, until late May. There is time to negotiate. Threating tariffs on the remaining $325bn Chinese imports should sharpen minds too. For now we see classic safe haven bias, with yields subdued, yen outperformance and equities profit taking. The big sell-off would come if the talks irrevocably breakdown, we’re not there yet. There is still expectation that common sense will avoid mutual self-harm, and an eventual agreement reached. The alternative could be catastrophic for a fragile H2 2019 recovery.