Trade war keeps escalating, flash crash on TRY

Summary:

• Donald Trump decided to respond to the Chinese retaliatory tariffs on Friday contributing to a further trade dispute escalation
• PBoC has refrained from yuan’s devaluation, EM currencies plunge along with stock markets
• A “flash crash” took place on the Turkish lira as traders were forced to liquidate their longs

No solution on the horizon

The end of the last week was really tumultuous for financial markets. Firstly, China chose to respond to the fresh US tariffs, announced earlier this month by Donald Trump, by signalling new levies on US goods worth $75 billion. Although the scale of Chinese duties is nowhere close to the steps taken by Washington, but the newly announced tariffs by Beijing have been precisely designed to be as painful as possible for the United States. As a result, China is going to target crude oil, soybeans as well as US cars by reimposing a 25% tariff rate which was suspended since April. In response to the step taken by Beijing, US President Donald Trump signalled the country would increase a tariff rate on $250 billon of imports, being already burdened with duties, to 30% from 25% effective on October 1. At the same time, he suggested that the remaining $300 billion of Chinese imports would be taxed at 15% instead of 10% starting September 1. On top of that, Donald Trump suggested that US companies should consider terminating to do business with China as well as the fact that he could even announce a national emergency if he only wanted to do so. Surprisingly, China seems to be quite calm seeking to lower tensions as China’s top trade negotiator said that the dispute should be resolved through measured dialogue. Moreover, the Chinese central bank also refrained from yuan’s devaluation and set the USDCNY reference rate almost at the same level as on Friday. On the other hand, the USDCNH has already reached its highest level ever (it is quoted since August 2010) suggesting abroad investors keep betting against the Chinese currency. 

Markets' response

As one may notice, Friday marked a deep deterioration in the ongoing trade spat between the world’s two largest economies, thus nobody should be surprised seeing a massive resveral in risk sentiment on Monday. Let us notice that US indices plummeted on Friday with the NASDAQ falling as much as 3% and the SP500 and the Dow Jones finishing lower by 2.6% and 2.4% respectively. In Asia, major equity indices are also trading lower and the largest lose is seen in the Hang Seng (down 2.8%). A tremendous decline in risk sentiment has propped up demand for haven with the Japanese currency being the strongest one in the G10 basket and the US 10Y bond yield hovering slightly below 1.45% at the time of writing. On the EM FX front, one may notice widespread losses as well.

Monday’s session could be particularly important for US investors as the US100 is already dancing around its major support line. Source: xStation5

Lira’s flash crash

Writing about EM currencies it is worth mentioning a “flash crash” in the Turkish lira taking place during morning trading hours in Asia. As a consequence, the USDTRY spiked all of a sudden to almost 6.40 and reversed all of this move several minutes later to be traded slightly above 5.80 again. The impressive TRY’s 12% plunge could have been spurred by traders who were liquidating their longs on the Turskish currency in the aftermath of the trade war escalation.

The “flash crash” pushed the USDTRY to the highest level since May. Source: xStation5

In the other news:

• The US and Japan reached a trade deal which is expected to reduce Japanese tariffs on American beef, pork and other agricultural products

• RBA’s Lowe said in Jackson Hole that while monetary policy might push up asset prices, it cannot stimulate economic growth in the medium-term (he implicitly hinted at a need for governments to engage in supporting stuttering economies)

• New Zealand’s trade deficit was 685 million NZD in July, the consensus has called for a 254 million NZD shortfall, a jump in imports was a prime reason behind the larger deficit