Asia market update - fears of US-China trade escalation

The evasion to safety continues

The setting remains little changed from a day earlier with the evasion to safety becoming more apparent across the market. The likes of the S&P 500 index saw a broad-based decline with fewer sectors spared in the steeper drop on Thursday. Prices had also declined towards the 2800 support at the lower end of the recent consolidation range, one to note with the trade impasse evidently still on its way towards further escalation with some of this morning’s headlines. The pressure on commodities had also been apparent, seeing the latest trade jitters sinking Brent crude prices firmly past the $70 per barrel level to a near 2-month low.

Heading into the Asia open, it is perhaps needless to say we are expecting the region to remain under the blanket drag from the trade friction. Early movers across the ASX 200, Nikkei 225 to the KOSPI were painted in a clear shade of red.

Over and above the threats exchanged, the lack of plans to resume negotiations between US and China appears to be inducing greater worries within the market that this prolonging trade conflict could worsen. It is apparent that the stakes on the table are rising. The possibility of a hike in tariffs to all Chinese imports places the pressure on the G20 meeting between the two Presidents to achieve an understanding for a delay to occur. Likewise the implementation of any additional retaliatory measures from China. Watch any dips past the 2800 level that could induce further selling pressure.

Source: IG Charts

Import duties on countries undervaluing currencies

Notably, this morning also saw reports highlighting that the US commerce department proposing duties on countries that undervalue their currencies relative to the US dollar which could further raise tensions. While no countries had been explicitly highlighted, Bloomberg’s report that the plan to allow US-based companies to seek anti-subsidy tariffs on goods from countries which the US Treasury Department noted to be engaging in competitive devaluation could mean a greater backlash for the markets. This is particularly so if President Donald Trump’s threat to label China a currency manipulator becomes a reality.

In light of the situation, it would be one watching the yuan movements over and above the sustained jitters within equity markets. Offshore yuan had declined sharply against the US dollar in recent sessions, USD/CNH was trading above the $6.90 level into this week. While there is no question that the Chinese currency fluctuates under a managed-floating system, the recent spate of fixing for the Chinese yuan as it rushed through the levels had shown that the authorities had attempted to curb the devaluation of their currency. The widening of the spread between the offshore and onshore yuan had also been poignant in showing the market-led move, thus undermining some of the grounds for the US to make such an accusation. That said, Chinese reaction will be one to watch in the upcoming sessions with the fixings and also whether this may extend the gloom within Asia markets.

Source: IG Charts

Yesterday: S&P 500 -1.19%; DJIA -1.11%; DAX -1.78%; FTSE -1.41%