Yen to strengthen on haven search

Further US-China trade escalations ahead?

The biggest question following the near 3.0% decline for the S&P 500 index this week had perhaps been of little doubt as to how much longer this escalation of trade tensions could continue to weigh on market sentiment. While it is a question that perhaps nobody, including the negotiators themselves, have an answer to, the likelihood for things to get worse before it gets better remains the case going into the Tuesday session.

Looking at the sudden turn of events, President Donald Trump had picked up the fight with the fresh tariffs threat despite the agreement of a truce at the G20. This had been based on China choosing to ‘re-negotiate the deal prior to signing’, in addition to the lack of agricultural purchases from the US, according to his tweets. For the Chinese leaders away at their retreat receiving this sudden news, the reaction so far had certainly been aligned with their commitment to ‘necessary countermeasures’. The perceived retaliation in allowing the yuan to weaken against the greenback had perhaps been one of the most targeted options in countering the impact of an increase in tariffs amongst their limited choices. In setting a further weakest yuan mid-point since May 2008 at 6.9683, the Chinese authorities had perhaps signalled their resolution at this point of time.

Policy support still expected

Despite the extended declines across US and Asia equity markets, the silver lining here is perhaps the expectation for continued policy support. This ranges both fiscal and monetary support from the PBOC and further rate cut hopes for the Fed that could help to cushion some of the fall. This, unfortunately, may also be a double-edged sword in potentially emboldening both the US and Chinese administration to carry with on this trade war, altogether still amounting to the bearish bias to hold within for the equity market in the near term.

Eye USD/JPY downsides towards 2018 lows

Consequently, for the likes of the safe haven trades, despite the oversold situation for USD/JPY (大口） and vice versa for gold prices, these may remain the shelters to be in the near-term until the situation reverses. Once again, the potential for USD/JPY on the downside extends towards the 2018 lows of around $104.65, one to watch.

On the flipside, a return back above the $107.43 support-turned-resistance would mark a dissipation of this strong risk aversion sentiment though that may not be the short-term expectation in light of the abovementioned factors.

Source: IG Charts

Yesterday: S&P 500 -2.98%; DJIA -2.90%; DAX -1.80%; FTSE -2.47%