Daily reviews

13.05.2019

Trump escalates trade war with China, the Japanese yen outperforms

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It was a busy and nervous week for global investors as Trump rattled the markets by an unexpected tightening position towards Beijing. At the start of the trading week, Asian stocks plunged after US President Donald Trump announced Sunday that the United States will raise tariffs on US$200 billion of Chinese goods.

  • Trump further escalates his trade war with China
  • Another round of negotiations broke off without a deal
  • Risk-off sentiment persists amid trade tensions
  • The Japanese yen extends the rally on risk aversion
  • Dollar mixed despite decent CPI numbers
  • Oil turns into a recovery mode but the bullish impetus limited

Asian equities

It was a busy and nervous week for global investors as Trump rattled the markets by an unexpected tightening position towards Beijing. At the start of the trading week, Asian stocks plunged after US President Donald Trump announced Sunday that the United States will raise tariffs on US$200 billion of Chinese goods. The US leader also threatened again to impose tariffs on all Chinese imports to the US — worth US$539.5 billion last year. Trump said he is raising some tariffs because the trade talks are going “too slowly.” This triggered a sell-off across equities across the globe and hurt the Chinese shares decently. Trump further escalated his trade war with China on Friday morning, raising tariffs on $200 billion worth of Chinese goods and taking steps to tax nearly all of China’s imports as punishment for what he said was Beijing’s attempt to “renegotiate” a trade deal. In turn, China vowed to retaliate. At the same time, the two countries continued their negotiations, and the US leader said towards the end of the week that trade talks between the United States and China would continue into the future and U.S. tariffs may or may not be removed, depending on the outcome of the negotiations.

Interestingly, Asian markets saw a positive session on Friday, led by a decent rally for the China’s Shanghai Composite. There were some speculations the Chinese officials may have intervened the market but the rally could also take place as investors still hope the two countries will strike a deal finally. As a result, the Shanghai Composite advanced 3%, marking its best one-day percentage gain since March. A slightly less pronounced gain was seen from Hong Kong’s Hang Seng Index which closed up 0.8%. Japan’s Nikkei gave up initial gains and finished down 0.2% while South Korea’s Kospi rose 0.3%.

US equities

After a Friday rally, stocks pulled back from their worst weekly declines since late December amid U.S.-China trade dispute escalation. As Trump said on Friday that talks with China will continue, and tariffs may or may not stay, the major indices managed to pull back amid a reversal in global risk sentiment ahead of the week’s close. Treasury Secretary Steven Mnuchin said the China trade talks were “constructive,” and then shortly after that China’s Vice Premier Liu He told reporters that Friday's trade talks went “fairly well”, which also helped to improve sentiment and lifted the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite into positive territory. Despite the late-session recovery, the three major indexes closed out their worst week of the year. For the week, the Dow fell 2.1%, its biggest weekly loss since March. The S&P saw a 2.2% weekly decline and the Nasdaq shed 3%, the biggest losses for both since the week ending December 21.

As for individual stocks, Uber Technologies Inc. shares slumped over 7.5% to $41.57 after the company’s IPO on the New York Stock Exchange. Uber priced its IPO afternoon at $45 a share, which is expected to raise the company at least $8 billion. Shares of Viacom Inc. jumped over 2.5% after the company reported fiscal second-quarter earnings that beat expectations. The net income was $363 million, or 90 cents a share, in its fiscal second quarter to end March, up from $256 million, or 64 cents a share, in the year-earlier period.

Currencies

The dollar was lower against the yen and the euro. The Japanese currency continues to outperform due to a widespread risk aversion amid the trade war escalation. USDJPY rose on Friday and partly trimmed weekly losses but remains bearish in general and registered the fourth bearish week in a row. The pair dipped to early-February lows below 109.50 and stays below the 110.00 handle, which is the immediate short-term resistance now. Further losses could be in the cards as tensions between Washington and Beijing continue to persist.

As for the data, the US consumer prices rose 0.3% in April, below the 0.4% level expected by economists. Core inflation, which excludes volatile food and energy prices, rose 0.1% in April, below the 0.2% consensus estimate. Meanwhile, the Atlanta Fed President Raphael Bostic said that the central bank might have to cut interest rates if the new round of tariffs placed on Chinese goods causes consumer spending to suffer. The New York Fed President John Williams noted that recent core inflation readings “are a touch too low,” but so far “appears mostly to reflect normal volatility” in the statistics. According to him, current monetary policy was in the right place but that Fed will be monitoring inflation data closely to see that they rise to meet the central bank’s 2% goal.

Commodities

In the oil market, Brent turned into a recovery mode after a dip to fresh one-month low around $68.80. The prices rebounded above the $70 handle and the short-term technical outlook has improved as a result. The barrel closed the week higher, which shows that trade tensions stoked by a U.S. move to hike tariffs on Chinese goods failed to overshadow tightened global supplies and expectations of rising U.S. refining demand. Anyway, traders fear that growing trade tensions between the world's two largest oil consumers could affect oil demand. As a reminder, according to the IEA estimates, the United States and China together accounted for 34% of global oil consumption in the first quarter of 2019.

On the other hand, traders believe the OPEC and its producer allies will extend the six-month output-cut agreement in coming weeks, which supports the market as well as the US sanctions against Iran and Venezuela. Besides, as fresh Baker Hughes data showed, the number of active U.S. rigs drilling for oil fell by 2 to 805 this week. That followed an increase of 2 oil rigs the previous week. Technically, Brent needs to get back firmly above the $71 handle in order to see a more robust recovery.