Market update: Traders sell and hide as trade war heats up

by Mihály Tatár

Good Morning!

• The impression that a real trade war is now unavoidable – reinforced by China’s decision to let the Yuan weaken past 7 against the Dollar, it’s most painful answer avalaible as there are simply not enough US imports to hit with tariffs for Beijing –   resulted in anxious risk-off trading: Traders sold stocks (SPX -0.73%, SPX futures -1.2%, Nasdaq -1.32%, DAX -3.11%, Nikkei -2.22%, Shanghai -1.18%), commodities (WTI 55, Brent 61 USD, Iron Ore -5%, Copper -2.6%), to a lesser extent the Dollar (EURUSD 1.1130 – currently the market prices in a 100% chance for another Fed rate cut in September), and bought instead safe havens (Gold 1456 USD, Swiss Franc -EURCHF 1.0890, Japanese Yen – USDJPY 105.80), including German bonds (German 5Y yield -0.74%, 10Y yield -0.50%). (Note that with the ECB easing expectations Euribors also slid lower – the 3M to -0.38%, a new low – these unprecedented levels of low financing and bond issuance costs can only result in the economic golden era for the Eurozone – if we accept the ECB’s economic argument, that is.) It’s worth mentioning that the market was especially fearful of the Chinese mega-banks (ICBC, China Construction Bank, Bank of China, Agricultural Bank of China, which together control more than 14 trillion Dollars in assets) and these were sold heavily (ICBC for example lost 11 billion USD of market value last week), since Beijing began using these to rescue collapsing smaller lenders and prop up Chinese money markets. Otherwise, Prime Minister Boris Johnson continued its pre-Brexit spending boost (promising more money for the National Health Service and the railway system – somewhat funnily, this resulted in angry media accusations he is in fact preparing for an early election – spending more on domestic issues was a main Brexiter campaign promise  –  GBPUSD 1.2130, EURGBP 0.9170), and regional currencies remained under pressure (EURHUF 327.70, EURPLN 4.3140, EURCZK 25.85).

• While the mainstream media was busy trying to blame Donald Trump for the US mass shootings (interestingly this time there was no Democrat politician to describe the events as simply ’somebody did something’ as with 11/September), and very pro-NATO and pro- new EU army Germany declined to take part in the US-led naval mission to protect tanker ships in the Gulf (you know, according to the SPD, ’European forces in the Persian Gulf would be hostage to a situation over which they have no control’, auch, welcome to life); strategists noted that China’s social credit system is now quietly applied on foreign businesses operating in the country: ’Blacklists’ and ’Redlists’ are created based on the ’behaviour’ of foreign companies, which then have a direct impact on everything the firm does with authorities, from gaining licences, permits to police investigations, tax breaks and even on the result of Internet searches. (From this you can get feel that even if there will be a US-Chinese trade deal,  how harmonic the relationship in the long term will be.)

Have a nice week,

Mihaly

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