Stocks experience biggest daily losses in 2019, as trade war takes ugly turn

Trade-war begins a new, frightening chapter

All signs point for now, at least, that we are experiencing a significant escalation in the US-China trade-war. Apparently exhausted by diplomatic niceties, the Chinese have seemingly thrown economic prosperity and financial market stability to one side, in order to keep face against the latest tariff hike from US President Trump’s administration. It’s a worrying development: attacked on multiple fronts, the Chinese Communist Party are looking as though it’s shifting its priority to international-prestige and internal-social-control. This could mark a dangerous turn for global financial markets, as matters of economic concern for China become subordinated to strategic, geopolitical priorities.

China’s one-two counter punch

The catalysts yesterday: the PBOC set its daily onshore-Yuan fixing below 6.90 for the first time this year, sending the offshore-Yuan below the 7.00 mark for the first time ever. Combined with the announcement that the CCP has instructed state-owned business to stop buying US agricultural products, the development is a significant one for global financial markets. It represents a conscious depreciation by Chinese policymakers to retaliate against the US’s latest tariff hikes. The potential consequences of such an act could be twofold. What will US President Donald Trump do in response? Could this prompt a wave of liquidation of financial assets by Chinese investors?

Stocks registered worst day of 2019

Investors don’t want to be holding risk assets, it seems, for as long as it takes to find out the answer to these questions. Global equities have been wiped by Monday’s new chapter in the US-China trade war. The equity index map is painted a deep blood red this morning. European equities fell just shy of 2% overnight, the FTSE100 dropped nearly 2.5%, and Wall Street stocks are down by around 3%. Stock market indices have sliced through technical levels of support, arriving at crucial long-term trend lines in a rapid fashion. In the current fog of the (trade-)war, every possible future looks dim.

Recession indicators flashing

Be that true or otherwise, markets are pricing a world of slower, and more volatile economic growth, today. Government bonds have added to recent gains, with the yield on the benchmark US 10 Year Treasury note falling to 1.73% – it’s lowest level in two years. A more portentous signs: the key US recession indicator, the spread between the 3-month Treasury note and 10-Year Treasury note has inverted to negative ~30 basis-points. This is despite market participants pricing in much more aggressive US Fed rate-cuts in the coming months. The USD is down generally as-a-result, with the Yen and Swiss Franc popping higher, and gold hitting another 6-year high.

ASX to wear further pain

The ASX 200 was swept up in the wave of panic-selling that consumed global markets, yesterday. In a day of woeful market breadth, and quite high-volumes considering yesterday’s NSW bank holiday, the market plunged over 1.85%. No sector was spared the pain, either: but the growth tied areas of the market certainly wore the worst of it. A tumble in iron ore prices below $US100 legged the materials sector, which stripped 32 points from the ASX 200. The only shining light amidst the panic was (again) gold stocks: they rallied nearly 5%, as the price of gold, denominated in AUD, hit record-highs.

In other, local news

The RBA meet today, and are close to certain to keep interest rates at their historic low of 1.00%. Markets appear relatively satisfied that the RBA will remain in a somewhat what and see mode this month, as June and July’s interest rate cuts feed through the domestic economy. And at that, with other global central banks moving first, and the AUD depreciating, the need to ease rates further has diminished, somewhat. The question today, therefore, goes back when (and certainly not if) the RBA cuts next. The market is currently pricing the next cut to come in October.

Australian Dollar in focus

Naturally, the Australian Dollar will be in focus today, however there is the risk that action in the currency around the RBA’s meeting will be washed-out by broader, global-economic themes. The local unit has been smoked in recent weeks, as fresh trade-war concerns, and a less-dovish US Federal Reserve last week, drive flow away from riskier-currencies. On a relatively short-term basis, the Australian Dollar is looking oversold from a technical point of view, with the Daily RSI delivering a sub-30 reading. A dovish RBA could prove another blow to the AUD/USD today, though a lot of “bad news” is probably already in the price.