Trade-war escalates, as panic returns to global markets

Trade-war escalates again

Panic once again gripped financial markets on Friday night, as the US-China trade-war took another nasty turn, and reinflamed fears of a major, global economic slow-down. The latest escalation came after China announced that it would be slapping 25% on $75 billion worth of US imports – mostly agricultural and automotive products, as well as WTI Crude. Clearly enraged, US President Trump’s reaction was swift and heavy. Existing tariffs will be hiked from 30% from 25%, and the remaining sum of Chinese imports not presently exposed to tariffs would be taxed at a rate of 15%, from October 1.

Spike in volatility prompts search for safety

The VIX spiked back above 20, risk assets sold-off, in favour of safe-haven assets, and anything seemingly tied to the strength of the global economy was dumped, practically en masse. The news really blindsided market participants. Undoubtedly, few were under any illusions that the situation between the US and China was nothing less than fraught with danger. But focus on Friday was very much being directed away from the trade-war, and towards instead the central bank gathering in Jackson Hole. That event, and its implications, were thoroughly washed from the headlines on the trade-war news, with traders single-mindedly scrambling for safety.

Stocks, growth-tied markets tumble

Again, global markets are back to trying to measure and price-in the likely impact of even higher trade-barriers in the global economy. The developments happened so late in the week, that one expects that process to continue to develop as the early stages of the week gets underway. Stock markets will surely face a belting this morning. SPI Futures are pointing to a substantial 86 point drop at the open this morning. This comes after the S&P 500 shed 2.6% on Friday, courtesy of a significant sell-off in the major tech-shares, as well as shares in the industrial and consumer sensitive sectors.

Government bonds rally

Naturally, the flow found safety in government bonds, pushing yields to eye-wateringly low levels, as investors price-in even more aggressive monetary policy stimulus from central bankers across the global. As such, US Treasury yields dropped by roughly 8 points across the curve, pushing the 10 Year note back to 1.54%. And Japanese Government Bonds and German Bunds yields dived deeper into negative territory across the curve, with the yield on the 10 Year JGB trading new fresh multi-year lows at 0.23%, and the yield on the 10 German Bund returning to the 0.7% mark.

Gold spikes, USD falls, oil sells-off

The fall in global bond yields and even greater global political instability drove a renewed rally in gold prices, pushing the yellow metal towards fresh 6-year highs. The likely ill effects of the trade-war on the US economy pushed haven flow away from the USD, and into Yen instead, which plunged into the 104 handle. The weaker Greenback kept the losses for the AUD/USD relatively contained, but our currency is mostly lower across the other major currencies. And Industrial commodities sold-off across the board. WTI Crude fell over 2% for the session on news it would be directly target by Chinese tariffs.

Jackson Hole symposium comes with clear warning

The latest escalation in the trade-war was uncannily well-timed with the weekend’s Jackson Hole symposium. The central discussion at the summit was about the limitations of monetary policy as a tool of economic management, and how governments needed to step up with fiscal and structural reforms to ensure ongoing economic growth. Now, this doesn’t mean that central bankers aren’t going to refrain from throwing the kitchen sink at the global economy. They more-or-less indicated that they will. But their concern seemed this: that with all the downside risks confronting the global economy right now, monetary policy alone will likely not be enough to save the day.

A data heavy week takes on greater significance

A week that would have been defined by a swathe of fundamental economic data now gets subsumed by the trade war. However, though no longer the highlight, the abundance of information probably takes on greater significance, as a consequence. A series of local GDP components, such as Building Approvals and Private Capital Expenditure data, will be printed, and will set the foundations for next week’s official GDP release. US GDP data will also be published, along with Core Durable Goods orders and PCE Inflation numbers. And Chinese manufacturing PMI data comes-out on Friday, with interest there in whether Chinese manufacturing activity is still in decline.