Another Rough Day in Store as US-China Trade War Ramps Up
For a person who’s been obsessed with stock market gains since his election victory 16 months ago, US President Donald Trump doesn’t appear too concerned about the impact his tariffs are having at the moment.
Trump may be prepared to add the European Union to the list of those that are temporarily exempt from the tariffs – with Canada, Mexico and Australia having been allowed similar exemptions – but that has barely cushioned the blow for investors.
Understandably, the prospect of a trade war between the world’s two largest economies is not particularly desirable for investors. The global economy is finally starting the tick along nicely after a decade of efforts to repair the damage of the global financial crisis and the issues that followed and now we’re potentially having to deal with an entirely self-inflicted and avoidable problem.
Trump’s decision to impose tariffs on $60 billion of Chinese products will undoubtedly trigger a retaliation from the world’s second largest economy and bring about a series of actions that could end in a full blown trade war. Already investors have made their feelings known about such measures, with the Dow and S&P 500 yesterday shedding nearly 3% alone and futures suggest it’s going to be another rough session as we head into the weekend.
Dow 30 (US30) Daily Chart
Investors Flee For Safety Putting Particular Pressure on Japanese Stocks
Europe and Asia were not immune to the news, with Chinese stocks unsurprisingly taking a particular beating overnight. Japanese stocks were also hit particularly hard, with the appreciation of the safe haven yet delivering a second blow to domestic stocks that rely heavily on exports.
USD/JPY Daily Chart
Clearly investors aren’t particularly keen to carry much risk into a weekend that could see tensions escalate between the two nations. Another safe haven, gold, is up more than 1% on the day and more than 2% over the last couple of days as investors typically opt for the yellow metal in times of uncertainty.
Sterling Slips as May Hopes to Secure Transition Deal Approval From EU
As the EU prepares to vote on the Brexit transition deal that was agreed earlier in the week, the pound is trading a little lower in a potential sign of exhaustion for the currency. Even a clear indication from the Bank of England on Thursday that a rate hike is near – probably May – wasn’t enough for the pound to hold onto gains for very long, potentially a sign that all the sterling-positive news is now fully priced in.
GBP/USD Daily Chart
If the vote passes as expected today, it may not be enough to improve the fortunes for the pound but it will come as a relief to Theresa May who will see it as a significant step towards achieving a Brexit deal that, at times, has looked in doubt. The challenge for May now centres on forging a future relationship with the EU that needs to be wrapped up by the end of the year, with the next mini-deadline being June.
Despite unrest among some Brexiteers to the terms of the transition deal, May must be feeling pretty pleased with herself but now needs to convince businesses that she can be entrusted to deliver a deal that protects their interests also. If nothing is, in fact, agreed until everything is agreed, May will have to rely on trust to prevent businesses from putting contingency plans into practice, something some have already started doing regardless.