U.S.-China Trade War: What To Buy And What To Sell

The financial market is spooked, investors are being cautious and prefer to stay away from risky assets. Safe-haven currencies, on the contrary, have recently gained massive popularity in financial markets, offering boundless earning opportunities.

The main reason for such a sharp shift in market sentiment was rising US protectionism and increased pressure on China last week, while the US sought to hammer out a bilateral trade deal. On Friday, Trump raised tariffs from 10 percent to 25 percent on $200 billion of Chinese goods. According to US Trade Representative Robert Lighthizer, these actions were caused by the refusal of Chinese officials to fulfill their earlier commitments. “Over the course of the last week or so, we have seen an erosion in commitments by China. I would say retreating from specific commitments that had already been made,” - Lighthizer told reporters.

As a result, the scheduled tariffs went into effect on May, 10, ruining investors’ hopes of a “happy end” in the US-China trade war. And what is more, the market starts wondering, if there’s even a possibility of further negotiations between the world’s two largest economies.

As expected, China has reacted accordingly and made its move too, announcing on Monday, that it would increase its own tariffs on $60 billion of American products. These penalties will go into effect on June 1, according to China’s finance ministry. “China’s tariff move is in response to the US unilateralism and trade protectionism,” the ministry said in its statement. As soon as this news hit the market, the US Treasury yields hit their lowest levels in six weeks. The yield on the benchmark 10-year Treasury note dipped to 2.394%, under that of the 3-month Treasury bill at 2.418%. Judging from the past, such inversion of a bond yield curve can be considered a sign of an impending economic downturn.

Plunging US bond yields were a consequence of growing market concerns over the prospects for global economic growth. New trade barriers and restrictions indicate the ongoing, full-blown trade war, which can cover more than 5% of the total world trade and weaken the global economy. It’s worth noting, that the levies imposed on Chinese goods by Donald Trump’s administration have already hit the currency earnings: China’s exports suffered a surprise fall by 2.7% in April, while the net currency inflow from foreign trade turned out three times lower than forecasts - $ 13.84 billion against $ 35 billion.

A steep decline in the US Treasury notes triggered an increased demand for gold and other safe-haven assets, The Swiss franc and the yen rose sharply against the US dollar. Investors believe that by the end of this month, Trump will announce his intention to impose new tariffs on the remaining Chinese goods worth $ 325 billion. Given the likelihood of an escalated trade tension between the US and China, we recommend betting on further gold’s growth with the target at $ 1,350 per troy ounce, and on USD/JPY and USD/CHF decline with targets at 105.00 and 1.0000, respectively. A combination of these positions can double your initial capital.