Risk-off visits again as US-Sino trade spat escalates

Summary:

  • Chinese state media question if further trade talks with the US make sense after Trump hit Beijing with duties
  • Chinese government has asked its state-owned companies to stop buying US agricultural products
  • Chinese onshore yuan hits its lowest level since the financial crisis in 2008

Talks or lack thereof

The new week across financial markets have begun in gloomy mood after reports that Beijing is reportedly considering if conducting further trade negotiations with the United States further makes sense after Donald Trump hit China with a new round of tariffs on $300 billion of imported goods, according to the South China Morning Post referring to a commentary published in the Economic Daily newspaper on Saturday. This commentary also says that “China has no interest in domestic US politics at all but has been kidnapped to be used for this purpose for multiple times. As [the US] continues to flag new tariffs, is there a necessity to continue the trade talks in the near future?.....It depends on the attitude of the US.” Let us remind that the announced 10% tariff rate of $300 billion of Chinese goods is to come into effect on September 1. 

Meanwhile, the Chinese government has asked its state-owned enterprises to suspend imports of US agricultural products, according to Bloomberg. This is as if retaliation for the duties announced by Trump on the past Thursday. Now, as Chinese state-run companies are going to stop buying US agricultural products one may expected increased demand for those kind of products from Brazil where prices are expected to increase. In turn, agricultural prices in the US have declined at the beginning of this week with wheat being 1.8% down, corn falling 1.3% and soybean declining 0.7%. 

Markets react

In response to a further trade war escalation nobody should be stunned by heavy declines in equity markets, increased demand for safe haven assets and overall dismal sentiment. As a result of the above-mentioned comments, the Hang Seng has already slid 2.5%, the NIKKEI has fallen 2.3% while the Australian S&P/ASX 200 has moved down by 1.8%. Looking at commodities one may also see a big reversal from industrial metals with iron ore prices plunging almost 7% at the time of preparing this commentary. Crude prices, both grades, are trading lower by slightly more than 1% while gold prices are climbing 0.9% and silver is up by 1.8%. In the FX space the Japanese yen is standing out the most being 0.6% up against the US dollar, a sign of increased demand for safe haven assets. The Swiss franc is also trading 0.3% higher against the US currency. The biggest loser among G10 space is the Australian dollar falling more than 0.4% against the greenback whereas the heaviest pain is being felt by the renminbi being down 1.3% against the USD - the USDCNY has crossed 7 for the first time since the financial crisis in 2008. Last but not least, bond investors are also looking more eagerly at the safest sovereign debt what has pushed the US 10Y bond yield below 1.78% this morning.

The USDJPY fell below its key support line (orange) last week and this breakdown has yet to be negated thus far. From this point of view bears may look at 104.7 as their nearest target. Source: xStation5

In the other news:

  • Australian services AIG index for July fell to 43.9 from 52.2

  • Chinese services Caixin PMI for July declined to 51.6 from 52

  • PBoC said it was able to keep the yuan stable at a reasonable level adding that the latest depreciation was due to trade protectionism

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