Risk-off comes back as Trump escalates trade war

Summary:

• US President Donald Trump signals tariffs will be increased soon
• China mulls over canceling trade negotiations scheduled to take place this week
• Chinese equity markets plunge in response to a Trump’s tweet

Donald Trump roils markets

Chinese equity markets have plummeted while the Japanese yen has jumped at the beginning of the new week following a tweet from US President Donald Trump suggesting more tariffs to come. He tweeted yesterday evening “the trade deal with China continues, but too slowly” and as a result the United States would undertake proper steps. Namely a 10% tariff imposed on $200 billion of imported goods is to be raised to 25% as soon as this Friday whereas additional $325 billion of goods, being untaxed so far, is to be taxed at a 25% rate soon. This comment came at a time when market observers were anticipating further progress in the ongoing US-China trade negotiations. Therefore, the Trump’s tweet has had so far a massive impact on financial markets and, if this announcement comes into effect, it may also have serious ramifications on the global economy. Meanwhile, Beijing has already informed that it could cancel trade negotiations scheduled for this week with US officials. All of that means that we again are moving away from a final deal between the world’s two largest economies which would reassure investors all around the world and offer more optimism when entering the second half of the year. Let us also recall that many institutions and companies have said recently that they expect economic activity to improve in the second half of the year, however, with a further trade war escalation being just around the corner one may expect that these upbeat hopes could not come true.

Markets crash

In terms of a response to the Trump’s tweet seen across financial markets one may focus on Chinese equities where the Shanghai Composite is plunging as much as 5.9% at the time of preparing this analysis. The Hang Seng (CHNComp) is declining 3.5% while the Australian S&P/ASX 200 (AUS200) is going down 0.9%. Such a gloomy outlook is not limited only to equities as currencies have also been affected. The Japanese yen is by far the best performing major currency this morning being up 0.25% against the US dollar. The Swiss is trading also slightly higher while the risk-related currencies such as AUD and NZD are among the worst performing ones. The oil-related currencies like NOK and CAD are also falling roughly 0.5% against the US dollar being additionally harmed by declining oil prices. Crude prices are down more than 2% this morning mirroring fading hopes that an economic improvement will finally come in. Looking at the EM FX space one may also notice significant falls with the renminbi going down 0.7%. Shortly before 7:00 am GMT S&P500 futures are trading 1.7% lower, implying a red opening this afternoon.

The Hang Seng (CHNComp) is down more than 3% this morning. The Trump’s tweet pushed the price to the 38.2% retracement of the latest upward move. As for now, the first important resistance may be found in the form on the broken 23.6% retracement. Source: xStation5

In the other news:

• Chinese Caixin PMI for services ticked up to 54.5 from 54.4 in April; the composite index slightly deteriorated to 52.7 from 52.9 due to a fall in manufacturing

• PBoC will lower the reserve requirement ratio for smaller banks effective as of May 15, the move is to free up 250 billion yuan in long-term funds and to benefit a thousand of rural banks