Unsurprisingly reaction to the US plans to impose tariffs on an additional $200bn of Chinese goods (announced early yesterday), has triggered a sell off across risk assets. European and US equities closed down between 0.5% and 1.6% and the commodity complex is also a sea of red with Brent oil down over 6% following reports that Libya will resume export activities. The UST curve is slightly flatter whilst the USD is stronger across the board with AUD the big G10 loser amid the risk off and softer commodity environment.
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Asian equities came under pressure yesterday following news that the US administration had begun plans to impose tariffs on an additional $200bn of Chinese goods. This announcement was made after the New York close and late yesterday, China said that it intended to retaliate if tariffs are enacted adding that they won’t give into ‘’threats and blackmail’’. The US Trade Representative’ss office said the 10% tariffs could take effect after consultations end on 30 August, so plenty of time before rhetoric becomes reality. Yesterday the Shanghai Composite closed at -1.76% and Nikkei ended at -1.19%
So against this backdrop risk assets remained under pressure for most of yesterday’s session. Major European equity indices fell around 1.5% on average and main US indices closed down between 0.55% and 0.88%. In the US, Industrials and Energy sectors led the declines reflecting the softness within the commodity complex with Brent oil leading the way (down over 7% at one stage, now – 6.18%), following news that Lybia would resume export activities at its eastern ports, easing concerns of a global supply shortage.
US equities have outperformed in the sell off and the USD Index terms has had its best daily gain in ten days ( DXY +0.61% at 94.711). Price action over the past 24hrs suggests that at least for now, the market thinks that in an environment of heightened US led trade tensions, the US economy will hurt less than others and the USD will find more buyers than sellers, not only from Emerging Market FX, but also within the majors.
Looking at G10 currencies, it is not surprising to see the AUD as the big loser, down 1.22% and currently trading at 0.7380. In previous reports I have noted the Australian Dollar vulnerability to EM fortunes, the AUD is often seen as a liquid proxy option for EM exposure given the strong Australian economic links with China and thus it is not surprising to see the AUD declining amid the current trade-driven global growth concerns. Add to that a small spike in the VIX index (up 1p to 13.63) along with commodity declines from oil to copper (-3.20%), LMEX(-2.52%) and gold (-1%), and you have the perfect recipe for a soft AUD. I remain of the view that trade tensions are likely to get worse before they get better and as such I still see more downside risk for the AUD.
Amongst the other G10 decliners it is interesting to note the CAD is -0.74% despite the fact that the Bank of Canada lifted the Cash Rate by a quarter point to 1.5% while the statement reiterated the Bank’s intentions to continue with its gradual tightening plan, brushing aside trade tensions concerns. To be fair, USD/CAD did fall post the BoC statement, dropping to an intra-day low of 1.3066 from 1.3136 prior, but in the end the sharp decline in oil prices dominated proceedings with USD/CAD now trading at 1.3208.
A word on USD/JPY also deserves a bit of space on the daily. Traditionally in a risk off environment, JPY enjoys a safe haven bid, but the recent trade tensions has seen USD/JPY well supported above the 110 area and overnight USD/JPY made a move above 112.35 ( now just above the figure). Last week we learned that buying of overseas equities by Japanese investors reached an all-time high, so for now it seems that Japanese investors are treating the sell-off in equities as a buying opportunity. USD/JPY has now broken through an important resistance level, so technically it has room to move higher, but caution is required given the risk off environment.
Reports that some ECB policy makers see an increase in interest rates as early as July next year saw Bund yields edge higher. EUR/USD pushed up toward 1.1760 at one point before the single currency gave way to broad USD strength. EUR/USD opens this morning around 1.1675, down around 0.6% on this time yesterday.
Sterling was relatively subdued compared to other major currencies with no new news on Brexit machinations with the Pound 0.5% lower, now at 1.3205.
US Treasury yields fell immediately yesterday after the new China tariff list was revealed. From around 2.865%, the 10 year Treasury yield fell around 4bps before stabilising. Intra-day, yields did push back above 2.86% supported by higher inflation data, before pulling back to around 2.84% as oil prices slumped.
This morning on the Economic Front we have Euro-Zone Industrial Production at 9.00 am. This is followed at 11.30 am by the Minutes of the latest ECB Meeting. At 1.30 pm we have US CPI and the Weekly Jobless Claims. Finally at 6.00 pm we have the Monthly Budget Statement.
Speaking wise today we have the Fed’s Kashkari and Harker at 1.30 pm and 4.15 pm respectively.
September S&P 500
There was no way that the US traders would leave such a large ‘’Open Gap’’ yesterday following the latest tariff threat by Trump on China. Unfortunately the S&P just missed my buy level yesterday morning before rallying over 16 Handles and I am still flat. This morning with the Chinese stock market closing higher the S&P is back to near yesterday’s high. I still believe that Trump is still playing games with China by trying to get them to negotiate and that it is only a matter of time before the S&P again shrugs off the tariff news and makes new all-time highs. Today I will now raise my buy level to 2763/2773 with a 2756 stop. I will still be a small seller on any rally higher to 2810/2818 with the same 2825 stop.
EUR/USD
Late yesterday the Euro traded lower to my 1.1680 buy level. I am still long and I will now lower my T/P level on this position to 1.1695. I will only add to this trade on any move lower to 1.1640 with the same 1.1610 stop. If any of the above levels are hit I will be back with a new update for my Platinum Members.
September Dollar Index
Unfortunately the Dollar again juts missed my buy level before trading higher and I am still flat. Today I will now raise my buy level to 93.65/94.05 with a 93.35 stop.
September DAX
My DAX eventually worked with the market trading lower to my 12390 buy level. I incorrectly thought that my other Index buy levels would hit and for that reason I covered my long position at my revised 12405 T/P level and I am now flat. Today I will again look to buy the DAX on any dip lower to 12300/12370 with a 12250 tight stop. I still do not want to be short the market at this time.
September FTSE
Frustratingly the FTSE missed my 7500 buy level with a 7505 low print before having a nice rally and I am still flat. Today I will raise my buy level slightly to 7470/7510 with a 7450 stop. Just like the DAX above I still do not want to be short the market at this time.
Dow Rolling Contract
Twice the Dow missed my buy level before rallying to again close over its 50 Day Moving Average. For the market to continue higher we need to break and close over Tuesday’s 24945 high as otherwise we could have an Island Reversal which is potentially at least short-term bearish. Today I will now raise my buy level to 24530/24680 with a 24450 stop. For now I do not want to be short the Dow at this time.
September NASDAQ
I am still flat the NASDAQ and today I will now raise my sell level slightly to 7340/7390 with a 7430 stop. Remember a break and close over 7400 is bullish.
September BUND
No change as I am still a seller on any rally higher to 163.10/163.40 with a 163.75 stop.
Gold Rolling Contract
Although Gold traded lower to my buy range late yesterday I did not buy the market myself as emailed earlier to my Platinum Member and I am still flat. The reason I cancelled my buy level was because I was long Silver which had a strong possibility of hitting my second buy level at 15.70. So far Gold is holding the key 1237 support level and today my only interest in buying the market is on a dip lower to 1225/1233 with a 1215 stop.
Silver Rolling Contract
No change as I am still long Silver at 16.10 with the same 16.25 T/P level and 15.45 stop. I will continue to look to add to this position on any move lower to 15.70 and if this happens I will be back with a new update for my Platinum Members.
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