Trump’s Trade Wars: Top 4 markets to watch

Summary:

• Trump reignites trade war concerns ordering to prepare a list of Chinese goods to hit the country if needed
• DAX (DE30) and Chinese Hang Seng (CHNComp) among the most exposed indices
• Soybean, AUDJPY could find themselves under pressure should frictions continue

China-US trade tensions are taking their toll, albeit not every market is doomed to failure. There are also some which could benefit from levies imposing by the two world’s largest economies. In today’s analysis we focus on 5 markets being the most affected by Trade Wars.

DAX (DE30)

Everybody zooms in on the US and China, but there are some markets elsewhere being under pressure due to tariffs as well, the DE30 is among them.

German exports to China have increased notably over the recent two years. Source: Macrobond, XTB Research

Germany’s vulnerability to trade has increased quite substantially over the last two years suggesting the DE30 could be at risk once trade wars further escalate. Notice that net exports were among the largest contributions to EMU YoY GDP growth in the past three quarters (the second largest contribution in the last three months of 2017). Finally, the DE30 includes stocks being particularly exposed to tariff risks such as Thyssenkrupp (TKA.DE), Volkswagen (VOW.DE) or Daimler (DAI.DE).

DE30 spiked to 13200 points following the ECB decision in June, but then it lacked steam and fell back. The closest support might be localized nearby 12550 points being underpinned by a 23.6% retracement of the 2-year long rally. Notice that further support levels also coincide with subsequent retracements. Source: xStation5

Soybean

Soybean has been undoubtedly one of the most negatively influenced markets on the back of agriculture tariffs slapped by the US on China. China is a huge grains consumer importing tremendous amounts of soybean both from the US as well as Brazil - the two largest producers in the World.

US minus Brazil soybean exports to China in metric tonnes. Source: Bloomberg, XTB Research

However, harvest in the US takes place once a year unlike Brazil where farmers are able to reap grains twice a year, therefore Brazil’s soybean is so keenly bought by China. Having said that, as you can see at the chart above seasonality matters a lot in terms of the soybean market, and while during the first half of a year China imports much more Brazilian grains, it changes during the second half of each year making soybean prices (being denominated in US dollar) yet more vulnerable to any trade disruptions.

Soybean is getting closer to its lowest levels since March 2009 as it could be one of the most undervalued commodity markets, but renewed trade concerns lessen its appeal at present. The most crucial resistances might be found at $905, and then at $1000, $1075. Soybean has so far had the longest losing streak (weekly) since 2014. Source: xStation5

Hang Seng (CHNComp)

Obviously, both US as well as Chinese stocks might feel the pain from trade frictions, but given that the Chinese market is regarded by investors as an emerging one declines there could turn out to be much more severe once a capital outflux gathers pace. Based on a set of data embracing the last three years one may calculate that relative standard deviation for the Chinese Hang Seng (CHNComp) totalled 14.8% while for the SP500 (US500) 11.4% matching assumptions the China’s stock market could witness more severe losses if trade tensions increase (at the same time one needs to be cognizant that an end of a dispute between the two feuding countries might bring more relief to Chinese stocks).

Chinese index has fallen below its relevant support/resistance placed at 11800 points coinciding with a 38.2% retracement of the upward swing begun in December 2015. Should the price be unable to get back above this level it could call into question more long-standing gains unless a US-China battle comes to an end. One of the strongest support might be spotted ar 10700 points in the vicinity of a 50% retracement. Source: xStation5

AUDJPY

This pair is one of the best proxy of risk sentiment prevailing on markets as the Australian dollar is seen as a riskier currency while the Japanese yen as a safe haven one. Therefore, once risk appetite gets rough, the pair tends to decline and the other way around. Given that trade tensions are unlikely to vanish any time soon one may suspect that the cross might find itself under downward pressure in the near term.

AUDJPY tends to show a positive correlation coefficient with global bond yields. Source: Bloomberg

The table above depicts correlation coefficients between the AUDJPY and the particular bond yield (this is 30-day rolling correlation over the last two years). As one may notice the greatest relationship is seen with Canadian and US securities. So, when risk appetite deteriorates it leads to falls in yields (bonds see a capital influx) as well as the cross. On top of that, tariffs are likely to dent commodity prices on which the Australian dollar depends to some extent.

AUDJPY failed to break through a 84 handle making a clear reversal thereafter. Notice that the pair quite accurately respected Fibonacci retracements in the past, hence any reactions from bulls might be expected once the pair falls to 79.6 or so. Having said that, this level could be easily beaten once tariffs risks surface anew. Source: xStation5