Risk aversion returns as tariffs take effect

24 September, 2018

Politics and trade tensions are expected to be the key market drivers this week. President Trump’s tariffs on $200 billion worth of Chinese goods came officially into effect today with China poised to retaliate on $60 billion in U.S. goods. While these actions seem to be already priced in, investors are becoming increasingly worried that the trade war may enter phase III. With Beijing canceling planned trade talks on Saturday and the U.S. State Department imposing sanctions against China’s defense agency, the relation between the two largest economies may deteriorate further. While markets in mainland China, Japan, and South Korea are shut for a public holiday, investors skepticism was reflected in Hong Kong stocks and commodity currencies which fell in early Monday trade. Whether the pain will begin reflecting in Wall Street depends on what happens next. If President Trump follows through on his promises to impose further tariffs on the remaining $267 billion of Chinese imports, investors may consider it as a signal to move out of U.S. equities.

Brent crude was back above $80 early Monday in another attempt to retest May’s highs of $80.50 after OPEC+ stopped short of promising additional extra output in a meeting in Algiers on Sunday. On Thursday, President Trump tweeted: “We protect the countries of the Middle East, they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices! We will remember. The OPEC monopoly must get prices down now!”. However, OPEC and friends do not see the need to drive production higher as markets remain well supplied. OPEC’s decision might lead to further overshooting in Brent Crude as a break above $80.50 would encourage technical buying with $85 a key level to be watched.

Sterling was holding steady after wiping out all the gains it built during the week before Friday. Markets thought that we might finally be seeing a Brexit breakthrough at the Salzburg Summit on Friday. Instead, the summit increased the chance of a no-deal Brexit as EU leaders slammed Theresa May’s Chequers Brexit proposal with the Irish border remaining a key barrier to a deal. With no tier one economic data on the calendar, expect GBPUSD to weaken further this week with a possible test below 1.3.

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