After Tuesday’s US tariff proposal announcement on $50bn of imports from China, early this morning China matched the US move by announcing tariffs of up to 25% on $50bn of US imports. The tit for tat response triggered a sell-off in risk assets, but this initial response quickly reversed as both parties express willingness to negotiate. US equities have closed over 1% higher, US Treasury yields are also higher and commodity linked currencies are stronger with the flying kiwi at the top of the G10 leader board.
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Just after the US close on Tuesday evening we had news of a proposal by the US administration to impose a 25% tariff on about $50 billion worth of high tech Chinese products in retaliation for what it says it has been decades of state-backed intellectual property theft by Beijing. Market calmness then ensued as the market awaited China’s response. Just as the European Markets opened yesterday morning, China announced its plan to placed tariffs of up to 25% on major US imports including airplanes, autos and soybeans, covering 106 categories of products and affecting $50b of goods. This was a carefully thought-out response by China as the targeted sector were clearly aimed at Trump’s key supporters. China did not specify a date for the tariffs to start and will wait for the US to implement its tariffs, which themselves are subject to consultation.
The US market was not yet opened when China made its trade tariff announcement, but there was a clear risk off response in Europe, as equities sold off, bond yields moved lower while in currencies JPY and CHF outperformed. Nevertheless this initial response quickly faded as rhetoric from both parties suggested there is still willingness to negotiate despite the increase in trade tension.
China’s Vice Finance Minister said that the country will ‘’keep its door open for dialogue’’ and that it ‘’wants to solve trade issues in constructive ways’’. Meanwhile President Trump tweeted “We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!. Later in the session, US Commerce Secretary Wilbur Ross said in an interview on CNBC that the US is not entering ‘’World War III’’ and left the door open for a negotiated solution.
So after an initial drop of over 1.5%, the S&P500 did a massive U turn and has ended the day 1.16% higher. Gains were broadly based with all sector, except for energy (-0.14%) recording positive returns on the day. The NASDAQ (+1.45%) and the Dow (+0.96%) also had a positive ending. Meanwhile US Treasury yields have ended the day higher with the a small steepening bias as the back end marginally underperformed shorter dated yields. The 2y note is 1.7bps higher and currently trades at 2.296% and the 10y tenor is at 2.802% (+2.6bps).
Currency moves have been relatively contained. Over the past 24hrs the USD has essentially traded sideways and although JPY went bid on the risk-off move, the turn in sentiment has more than reverse this initial reaction. Indeed USD/JPY is a few pips higher and now trades at 106.78. In contrast NZD is the outstanding currency, up 0.7% over the past 24hrs NZD is back above the 73c mark and it has outperformed on all the crosses.
Although not quite to the same degree, AUD has also outperformed the USD. The pair now trades at 0.7716 and now is marginally above the level recorded after Tuesday’s better than expected February retail sales report.
Late in the New York session on the back of news that the Trump administration has softened a key NAFTA demand for more North American content in car manufacturing, both the CAD and MXN are rallying reflecting optimism for a positive outcome on trade negotiations between the three countries. CAD now trades at 1.2770 (-0.30%) and MXN is at 18.09 (-0.63%).
The NAFTA news serves as an example yet again that President Trump’s negotiating approach is to go hard first, only to soften the stand afterwards before reaching an amicable compromise. The market appears to have taken a similar cautiously optimistic approach to the US-China trade tension and in a similar vein. Meanwhile the Fed’s Bullard said that an escalating US-China trade dispute increases uncertainty around the outlook, but he would wait and see how negotiations play out before adjusting his economic forecasts, and the end result may be a better trade relationship for US businesses.
Yesterday data releases have been largely ignored, but for the record soft UK construction PMI data has been put down to bad weather. Euro area CPI inflation showed the expected pick-up to 1.4% y/y but the core measure of CPI (not an ECB target) was slightly weaker at 1.0% y/y. US ADP employment was very strong. The US ISM non-manufacturing index came off its previous super-high level, while the employment component was stronger.
This morning on the Economic Front we have German, Euro-Zone and UK Services/Composite PMI at 8.55 am, 9.00 am and 9.30 am respectively. Next we have Euro-Zone Retail Sales at 10.00 am and this is followed at 1.30 pm by US Weekly Jobless Claims and the Trade Balance.
June S&P 500
The S&P recorded one of its largest Upside Key Day Reversals in many years with the S&P rallying almost 100 Handles off its early morning low. Yesterday was a frustrating trading session for me as I bought the S&P at an average rate of 2589 before getting stopped out shortly after the European Markets opened at 2578. As I am in Florida and I am posting earlier than normal, hopefully by the time you got to read my commentary the S&P may have been trading below my stop level before falling to a low just below 2560. Subsequently after the US Markets opened we closed the ‘’Open Gap’’ from Tuesday’s close before rallying to my 2629 sell level. Thankfully I had a not too greedy T/P level at 2623 on this position which was subsequently filled before the market rallied another 30 Handles into the close. Yesterday’s reversal again saw the S&P close over its 200 Day Moving Average. This move higher has to be respected and I would expect to now see higher prices before we hit the ‘’Sell in May and go away’’ which should lead to a more sustainable sell-off. Today I will now look to buy the S&P on any dip lower to 2623/2633 with a 2615 stop. I do not want to be short the S&P at this time.
EUR/USD
No change as my only interest in buying the Euro is still on a dip lower to 1.2160/1.2200 with a 1.2125 stop. Meanwhile I will leave my sell level unchanged from 1.2350/1.2390 with the same 1.2425 stop.
June Dollar Index
The Dollar again traded lower to my 89.60 buy level before rallying to my revised 89.78 T/P level and I am now flat. Today I will again look to buy the Dollar on any dip lower to 89.15/89.55 with a 88.70 stop. I still do not want to be short the Dollar at this time.
June DAX
There is nothing worse than having the correct view in buying the dip in the DAX which I did at 11880 before getting stopped wright on the lows of the day at 11810 before the market subsequently rallies over 250 points. I am still flat and today I will now look to buy the DAX again on any dip lower to 11870/11940 with a 11820 tight stop.
June FTSE
My FTSE plan worked well with the market trading lower to my 6890 buy level before having a nice 150 point rally. This move higher enabled me to cover my long position at my too early 6915 T/P level and I am now flat. The buy the dip has worked over the past 10 days in the FTSE and today I will again be a buyer on any dip lower to 6910/6960 with a 6865 stop.
Dow Rolling Contract
As I was already long both the DAX and S&P I waited to buy the Dow which I did at the bottom of yesterday’s range at 23630 before getting stopped out of this position at 23570 and I am still flat. Given the massive volatility no matter where you bought the Dow yesterday there was a fair chance you would get stopped out given the fact that the market traded below 23400 before rallying nearly 1000 points. Thankfully we had no sell levels in the Dow yesterday. The huge Key Day Reversal in the Dow has to be respected with the market now having strong support from 23900/24100, while resistance is from 24700/25100. Today I will be a small buyer on any dip lower to 23900/24070 with a 23780 stop. I still do not want to be short the Dow at this time.
June NASDAQ
My NASDAQ plan worked well with the market trading lower to my 6320 buy level before rallying to my revised T/P level at 6370. Subsequently the NASDAQ re-opened in my sell range from yesterday and I am now short at a price of 6600. I will look to add to this position on any further move higher to 6660 with a tight 6690 stop. Remember a break and close above 6675 is bullish.
June BUND
I am still flat the BUND and will continue to be a buyer on any dip lower to 158.20/158.60 with a 157.85 stop. As mentioned yesterday the Bund has strong resistance from 160.10/160.50 and I will still look to sell any rally to this area with a 160.85 stop.
Gold Rolling Contract
No change as I am still a buyer on any dip lower to 1310/1319 with the same 1303 stop.
Silver Rolling Contract
No change as I am still long at 16.45 and will only add to this position on any move lower to 16.15. My T/P level remains unchanged at 16.60 and if my second buy level is filled I will then lower my T/P level to 16.45.
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