Daily reviews

05.08.2019

Dollar gains on Fed decision, Trump announces new tariffs

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As Trump announced new tariffs against China, Beijing pledged countermeasures against the US levies. In a tweet on Thursday, Trump said trade talks would restart on September 1.

  • FOMC cuts rates but sounds less dovish than expected
  • USD rises due to strong data, Fed rhetoric
  • Trump threatens fresh tariffs on Chinese goods
  • Yen leads due to an aggressive risk aversion
  • Global stocks plunge on Trump’s threats
  • Oil on the defensive due to rising trade tensions


Asian equities

Asian stocks plummeted along with global equity markets in general, with the Shanghai Composite was down 1.4% and the Hang Seng lost 2.5%. As Trump announced new tariffs against China, Beijing pledged countermeasures against the US levies. In a tweet on Thursday, Trump said trade talks would restart on September 1. He also wrote that Washington will put additional tariff of 10% on the remaining 300 billion dollars of goods and products coming from China.

In turn, the China Foreign Ministry spokeswoman Hua Chunying said that "If the US is going to implement the additional tariffs, China will have to take necessary countermeasures". Interestingly, earlier in the week, Beijing said that the latest US-China talks were “constructive” and the negotiations will continue in September. So the unexpected escalation in trade tensions was very painful and stressful for global investors.


US equities

U.S. stocks suffered the worst week of 2019 as investors reacted dramatically to escalation the US-China trade war. The S&P 500 fell for a fifth straight day and registered its steepest weekly loss since December. A widespread risk aversion was fueled by Trump’s statement on Thursday that he’d slap more tariffs on Chinese goods. In turn, China vowed it would counter the threat. On Friday, the US leader ratcheted up his rhetoric further, saying he could boost the tariffs to a much higher number.

The additional pressure on stocks came from the Federal Reserve decision as the central bank cut rates but didn’t hint at further easing. As a result, the S&P 500 Index dipped 0.7%, hitting the lowest in five weeks and capping the worst weekly loss since December 2018. The Dow Jones Industrial Average declined 0.6% to the lowest in more than six weeks, while the Nasdaq Composite Index lost 1.6%, hitting the lowest in five weeks.


Currencies

The week was mostly positive for the greenback as FOMC statement was not as dovish as traders expected. However, the price action was mixed in general as the unexpected announcement from the US on new tariffs on Chinese goods sent the dollar dramatically lower against the safe-haven Japanese yen. On the data front, Dallas Fed manufacturing index showed factory activity continued to expand in July, consumer prices and consumer spending rose modestly, Consumer Confidence rebounded in July to 135.7 versus 125 expected. Pending home sales beat expectations, breaking 17-month losing streak, employment cost index increased 0.6% for the 3-month period ending in June 2019 versus 0.7% in the previous period, IHS Markit Manufacturing PMI fell to the lowest level since September 2009, ISM Manufacturing PMI came at 51.2 versus 51.7 previously. The July jobs report showed that the economy added 164,000 jobs in July, while unemployment rate remained at 3.7%. Factory orders increased 0.6% in June, trade deficit in goods narrowed in June as exports weakened, consumer sentiment index hit 98.4 in July, slightly topping previous numbers.

Meanwhile, the Fed cut rate by a quarter point, citing ‘global developments’ and ‘muted inflation’. In particular, the central bank has lowered the target range to 2.00% – 2.25% from 2.25% – 2.50% with two dissenting votes from the committee. As a reminder, it was the first rate cut in a decade. The Federal Reserve did not hint at future rate cuts, which sent the global markets in risk-off mode as traders were expecting a more dovish tone. During the press-conference, Powell said that the bank will “act as appropriate to sustain the expansion,” leaving the door for more cuts if needed. The greenback rallied across the board after the meeting.

As a result, EURUSD plunged to more than two-year lows around 1.1026, with the pair finished the week at 1.11. GBPUSD registered early-2017 lows below 1.21 and trimmed losses on Friday marginally. USDJPY meanwhile declined to January lows around 106.50 amid a broad-based risk aversion due to the unexpected escalation in the US-China trade war.


Commodities

Crude oil prices decreased for the week ending Aug. 2 amid an escalation of the trade tensions, with the price of Brent crude oil for October delivery was down nearly 2.5 percent. The futures fell sharply on Thursday as a number of bearish data and growing concerns over global trade added to concerns over economic slowdown, which in turn may weaken global oil demand. Earlier in the week, prices were rising amid expectations of a dovish rhetoric from the Fed. But the rate cut failed to push back concerns over demand, partly due to a widespread rally in the USD.

Larger-than-expected decline in U.S. crude inventories provided some support to the market. In the week ending July 26, U.S. commercial crude oil inventories decreased by nearly 8.5 million barrels, larger than expected drop of 2.5 million barrels. On Friday, Baker Hughes reported that the number of active U.S. rigs drilling for oil declined by 6 to 770 this week. That followed declines in each of the past four weeks. Brent registered mid-June lows at $60 and finished the week marginally above $61.