Trade tensions reasserted their dark cloud over markets last night with the effect of the U.S. Government Huawei ban rippling through technology stocks in particular. Investors marked down technology and semiconductor stocks not only on the prospect of lost sales to the Chinese telecom giant but also because these sectors may be the first in the firing line for any Chinese retaliatory measures. The spillover was also felt in the energy markets where concerns over global growth overwhelmed the initial rally sparked by OPEC+’s intentions to keep production tight.
The U.S.-China trade war is in danger of assuming Brexit-like characteristics – long and drawn out with a series of false dawns, but with no discernible progress made after a lot of emotional noise. China has been remarkably quiet on the retaliation front, but I suspect that won’t last for long now. When it does come, its effect on markets could be more powerful initially than recent U.S. measures as the world’s attention has been on America’s punch combinations and not its opponents.
U.S. treasuries, Japanese JGBs and German bunds may remain the favoured safe harbours for investors, with flows continuing into the U.S. dollar, Japanese yen (JPY) and Swiss franc (CHF). Some things never go out of fashion and in times of trouble, you can always rely on the classics.
The performance of European and North American stock markets overnight will most likely snuff out the feel-good election rallies we saw in India and Australia yesterday, also weighing on regional markets. A very quiet day data-wise means the street will have plenty of time to ponder trade-war scenarios and their implications for the global economy. The answers won’t be good.
FX
The U.S. dollar was mostly unchanged against the major currencies overnight with the action contained to equity markets. As the U.S. ratchets up the pressure yet again on China, regional currencies may feel the heat today in the absence of any heavyweight Asian data releases. With its high correlation to China, the Australian dollar (AUD) may struggle to hold onto its post-election gains above 0.6900.
Equities
The S&P fell 0.67%, the Dow Jones dropped 0.33% and the tech-heavy Nasdaq plummeted 1.46% as the ramifications of the Huawei ban surged through the markets. The price action in the technology and semiconductor sub-indices was even uglier, the feeling being that U.S. technology companies will be on the front line of any retaliatory measures by China.
The results should be predictable for Asian stock markets today. The Australian ASX and Japan Nikkei are already trading slightly in the red and Asia will probably be a sea of red this morning as regional markets open. Any salvos from China on the trade war front could deepen the malaise.
Oil
It was a game of two halves for energy markets overnight. Both Brent Crude and WTI rose strongly post the OPEC+ weekend meeting that reaffirmed production cuts. The rally soon spluttered though as a dig into the Saudi Oil Ministers comments, which highlight the fragile nature of the global economy, saw sentiment swing.
Global growth concerns saw Brent Crude turn and fall 0.20% to USD72.00 a barrel while WTI maintained some gains, rising 0.60% to USD63.10 a barrel. The divergence is likely a function of the outperformance of the U.S. economy vis-a-vis the rest of the world.
Unless we see a surprise headline or two from the Middle East, Asia will likely continue on a similar theme and be inclined to sell rallies. That could accelerate on any retaliatory announcements from China.
Gold
Gold continues to doggy paddle furiously and is clearly not going to sink without a fight, fighting off an initial sell-down and swimming its way back to the surface, finishing unchanged at USD1,278.00 an ounce. The price action remains unimpressive with the yellow metal struggling to find any safe-haven benefit from the global economic tensions of recent times. The rise in cryptocurrencies over the same period may give some insight into where those flows are now going.
Asia is likely to be happy to sell rallies above USD1,280.00 today in keeping with that theme. The USD1,265.00 region remains critical longer-term technical support.