Investors to hunker down as trade war enters ‘bewildering’ phase
August 25 2019 10:59 PM

Bloomberg /London

If the trade war momentarily played second fiddle to Jerome Powell’s Jackson Hole address, it has come crashing back to the forefront of concerns as most markets prepare to re-open for business today.
Renewed tension between the US and China has strategists betting investors will continue to seek the safety of government bonds, gold and the Japanese yen. Riskier assets are likely to decline, with some analysts predicting further depreciation of the Chinese yuan. Stocks in the Middle East yesterday gave global investors a taste of what’s to come, with indexes in Israel and Saudi Arabia falling at least 2%.
President Donald Trump’s criticism of the Federal Reserve chairman, coupled with a call to US companies operating in China to consider leaving, pummelled markets going into the weekend, with the dollar sliding amid speculation the US may intervene to weaken the currency.
Gains in Treasuries on Friday drove the yield on the 10-year note eight basis points lower to 1.54%, on course for its biggest monthly drop in more than four years, while the S&P 500 Index retreated 2.6%. The yen climbed the most among the world’s major currencies.
While Trump’s decision to limit the US response to imposing additional tariffs may have been a relief to some analysts, traders will likely start the week on a febrile footing.
“The trade war between the US and China is now escalating at a bewildering pace, which is likely to trigger further market volatility and expectations of ever more aggressive monetary easing from the Federal Reserve,” said Patrick Wacker, a fund manager for emerging-market fixed income at UOB Asset Management Ltd in Singapore.
Adding to the nervousness was a Group of Seven gathering in Biarritz, France, at which French President Emmanuel Macron appeared to anger the US by seeking to put climate change at the top of the agenda. The meeting may end without a final communique.
Mansoor Mohi-uddin, a Singapore-based senior macro strategist at NatWest Markets: “Investor sentiment is set to remain fragile in the week ahead” given the “highly fractious” G7 leaders’ summit, with “disputes over trade, global warming and the UK’s impending exit from the European Union” “Safe-haven assets will stay in demand.
The yuan will keep falling towards the bottom of its new near-term range of 7.05-7.25 against the dollar and the greenback will stay supported by limited Federal Reserve easing after Friday’s fears of the Trump administration announcing unilateral intervention to weaken the currency proved unfounded”.
“Only if the greenback was to spike suddenly to 7.50-8 in a full-blown trade war is the PBoC likely to start running down its foreign-currency reserves aggressively as it did in 2015 and 2016”.
Wacker at UOB Asset Management in Singapore: “What the new tariffs illustrate are the pace at which the trade war is now ratcheting up, with no way of knowing where it will end. While the tariffs could end with the threatened maximum 35% tariffs on all Chinese imports, a significantly more protectionist scenario no longer appears far-fetched”.
“Despite monetary accommodation, the escalation of the US-China trade war poses medium-term risks to global growth as the fire power of central banks is limited by globally low interest rates.
As such we expect increased volatility and a flight to quality, benefiting US investment grade assets and high-grade emerging markets”. Nader Naeimi, AMP Capital Investors head of dynamic markets in Sydney: The “bad-news momentum is accelerating, and if not contained soon, the vicious circle of bad news leading to fear then feeding into falling demand and circling back into more bad news will be difficult to contain. That’s how recessions start”.
“There is a strong possibility that markets will force the Fed’s hands in dealing with a possible currency war. What would the Fed do in the face of a much stronger dollar when they meet in September? Cut more aggressively? That’s to be tested soon”.
“I continue to hold long positions in gold and bonds against short positions in copper and oil, as well as long dollar, euro and yen against emerging-market shorts”.
Abdul Kadir Hussain, the head of fixed-income asset management at Arqaam Capital: “Risks of a further slowdown in global growth are increasing. Duration and high grade continue to be my focus and I would be wary of increasing risk at this point in the year”.
Edward Bell, the director of commodity research at Emirates NBD: “Chinese refiners may actively move away from taking US crude as the additional tariffs eat into margins, and also as a trade tactic encouraged by the Chinese government. Those excess US crude cargoes will need to be offered elsewhere and likely will need to be done so at a discount to compensate for the freight costs, or risk end up building up in inventories.”
“As for Gulf exporters, the tariffs may have a negligible impact. A cargo of heavy sour Saudi crude, for instance, isn’t a like-for-like match with the light sweet crude exported from the US.
A more likely beneficiary would be producers with roughly similar grades – for instance Algeria or west African producers”. “What’s more critical though is if the tariffs have a broadly negative impact on the Chinese economy and slow crude consumption growth even more”.

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