Trump’s tariffs spark new wave of global uncertainty
Asian markets lost ground on Friday amid reports that Trump is ready to open a new chapter in the trade war with China. Chinese stocks were also in the red, eliminating any modest achievements made this week.
EM markets remain weak, the Argentine peso continued to fall despite the rate increase by the Argentine Central Bank. And although the world market managed to relatively isolate itself from the consequences of Argentina’s crisis and the depreciation of the Turkish lira, it seems that this chain of unpleasant events will cause suffering to the markets.
Data released on the Chinese economy on Friday exceeded expectations, albeit slightly. Production activity was 51.3 points in August, only 0.3 points higher than the forecast. Activity in the non-manufacturing sector grew slightly more rapidly, the key indicator was 54.2 points, with a forecast of 53.7. Despite the relief on the economic front of China, ShCOMP continues to target the support level of 2,700, the Chinese yuan has slightly strengthened on the news.
Despite the relative manageability of the yuan exchange rate, an unpleasant consequence of the trade wars was the growth of volatility in USDCNY, which even exceeds the volatility in EURUSD in the last 30 days.
PMI data barely improved the mood, because attention is now focused on the new Trump tariffs. Bloomberg said that the president is ready to push new tariffs at $200 billion Chinese goods, as soon as the public discussion period ends this week. At first, there were doubts that the administration would be able to prepare tariffs in such a short period, but doubts quickly dispelled with the president’s resolute messages.
In an interview with Bloomberg on Thursday, Trump also threatened that he was ready to withdraw the US from WTO if they don’t finally “shape up.” Such an isolationist step is likely to be opposed by the Congress, but there is definitely a benefit from such verbal interventions.
Trump also rejected the European Union’s proposal to take off tariffs on cars, calling the EU’s trade policy “as bad as China’s.”
Canadian and Mexican concessions to the US, which almost led to a new NAFTA agreement, unfortunately, do not yet give grounds to believe that trade disputes with other partners will soon be resolved. In particular, yesterday the Chinese minister said that until the US talks with China on an equal footing, progress in trade negotiations will not be achieved. It seems that Trump’s tariffs aimed at improving the trade balance and the settlement intellectual property issues, are just a cover, in fact, it’s about eliminating a potential competitor in the technological sphere.
EURUSD broke the lower border of the channel on Thursday, recovering from the level of 1.1650, so further growth is limited and news about new tariffs will likely provoke a similar effect to the previous one – a sharp strengthening of the dollar due to expectations of increased inflation and instability in the markets of the emerging countries. If EURUSD fails to consolidate today significantly above 1.1700 – 1.1720, the pair will likely drop next week since the markets will be convinced that the momentum gained since a pullback from 1.13 is lost. The statement of the head of the Central Bank of Austria Ewald Novotny failed to help the euro increase its advantage against the dollar, or had, what appears to be, a very limited effect.
Short positions on the lira appear to be taking profit today, this is evident from the rebound of USDTRY from the level of 6.80 to 6.51 on Friday. However, most likely this will not help the Turkish currency decline to a psychologically important mark of 7 lire per dollar, after which a new spiral of depreciation may begin.
Uncertainty about the future on the financial markets finally woke up sellers of volatility, which closed some of their positions. The VIX index jumped by 10.45% on Friday, primarily due to the fact that the markets are seriously aware of the threat of new US tariffs against China.
As expected, Trump’s new tariffs caused a wave of uncertainty and outflow from markets with high returns. However, the dollar can not boast of the status of a defensive asset this time, as the US and the first signal probably can enter a new round of conflict escalation from the stock market. The market of treasury bonds does not trust the euphoria in the economy and the relatively good mood in the stock market, the yield of 10-year Treasury bonds is declining over the past two days, indicating that demand for risk-free assets is growing.
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