Tariffed again

Risk aversion Monday

While few were probably hoping for an eleventh-hour delay to the latest tariffs implementation, the exchange of tariffs between US and China nevertheless cast a cloud on the markets going into the fresh week. President Donald Trump highlighted into the end of the week that US and China meeting will continue in September though not providing any concrete details to carry the market. At the same time, remarks that the US is ‘going to win the fight’ adds teeth to the situation. Not only does this tells of the President’s resolution, it had perhaps been one to strengthen China’s as well.

Notably, China’s intention to delay retaliation does bode well for the situation from the previous week, suggesting that we may not see any escalation on their end. However, de-escalation still looks to be far away with the latest tariffs exchange. A 15% tariffs on $110 billion of Chinese imports and a retaliatory round from China across agricultural and meat product among others had been the newest changes to the on-going tit-for-tat tariff war between the two sides.

Consequently, with risk aversion, the favouring of safe haven yen, greenback and the avoidance of emerging Asia currencies remain the protocol going into September. The fresh month itself may offer little respite from the trade rhetoric with the next juncture for additional tariffs expected to strike on October 1 which will also be China’s National Day. Even if talks should be announced, the market is likely to approach the event with caution seeing how the previous iteration eventuated with further escalations.

USD/JPY (大口） can be seen caught between the tug-of-war between both the yen and greenback appreciation. That said, the bias remains on the downside here in light of expectations for continued implications from the trade tensions and the weight from other geopolitical issues such as the heightened likelihood of a hard Brexit. Economic data will play a key role this week, as told in our Asia week ahead, and further deterioration of economic conditions may be one to trigger the down move here. While the likelihood of an RBA remains uncertain this week, AUD/JPY downsides could be one to watch if we do get a surprise here.

Source: IG Charts

China’s manufacturing PMI disappointment

In addition to the abovementioned tariffs pressure on markets, China’s official manufacturing PMI had notably arrived missing expectations at 49.5, reflecting the continued stress from the economic slowdown and trade woes. This also marks the fourth consecutive month seeing the figure decline. Early movers in the region were broadly seen in red at the start of the session with the likes of the Hong Kong market taking a stronger beating in light of the weekend heightening of unrest in the region.

For the day ahead, look to China’s Caixin manufacturing PMI release for confirmation of the softening trend. US markets will be away as told which could make for thin volume before the slew of releases expected from the market.

Friday: S&P 500 +0.06%; DJIA +0.16%; DAX +0.85%; FTSE +0.32%