Tariff-geddon to sweep global markets

The Chairman of the Federal Reserve Bank, Jerome Powell, delivered his keynote address at the Jackson Hole Symposium on Friday apparently. You wouldn’t know it though, as his speech was swept away in a flash flood of tariff hikes by China and the United States, sharply escalating the trade war between the two from small scale engagements to a full-blown war.

With a genuinely Machiavelian sense of timing, China chose to announce tariff hikes on $75 billion of U.S. goods, just before the beleaguered Chairman Powell’s speech and the close of U.S. markets and the start of the G-7 meeting in Biarritz. It sent the equity markets plunging with a stampede of money heading into U.S. bonds and safe-havens such as gold.

Not to be outdone (ever), President Trump’s response was for a change, almost predictable. Post the U.S. markets close, President hiked tariffs on all $550 billion of China’s exports to the U.S. and also found the time to indulge in his 2nd favourite hobby after golf, bashing the Chairman of the Federal Reserve on social media. Mr Trump calling Mr Powell, the enemy, for not announcing an aggressive easing cycle.

For those who care, and you should, Mr Powell said the U.S. economy was humming along quite nicely but that the Fed could and would act as appropriately. His speech also noted that central banks don’t have a playbook to deal with peak globalisation and trade wars. Also, that new tools would have to be developed to offer monetary stimulus in an age of zero per cent interest rates, and with the quantitative easing fuel tanks around the world running on empty. Mr Powell obviously reads my daily note!

If the Chinese plan was for the other G-7 leaders to mollify Mr Trump over the weekend, this was perhaps naive. Following a rout on Wall Street on Friday, Asia will now have to price that and the post-close tariff announcements by the U.S. into this morning’s session. The results will not be pretty if the moves early trading by the S&P futures and gold are anything to go by. Gold has jumped 2.0%, and the S&P minis are over 1.0% lower.

It should be a big data week globally with U.S. GDP and personal expenditure, along with German GDP amongst others. Everything now is likely to be subsumed as the U.S.-China trade tensions explode into open warfare, and the central banks’ limits of monetary policy to offset its effects, are now cruelly exposed and well and truly out in the open.

Asia and Pacific markets, especially those with high beta to China growth and world trade, which is basically all of them, are facing possibly their worst single down day of the year today. Pricing in the consequences of tariff-geddon pre and post-Friday’s Wall Street close. Regional stock markets and currencies could well end the day with bloody noses as investors scuttle growth positioning and sail en masse into safer harbours to wait out the storm.

Currencies

The U.S. dollar sank on Friday after China upped the tariff brinkmanship. Havens such as JPY and CHF both rallied aggressively against the greenback with other majors such as Euro and GBP making steady upward progress. The dollar index lost 0.56% to finish at 97.62.

The picture is likely to be different in Asia; regional currencies are set to take a battering against the dollar with their near-universal, export-driven economies having high exposure to both China and global trade.

The offshore yuan (CNH) fell to 7.1800 in early Monday trading before stabilising around 7.1700 as I write. The onshore yuan (CNY) fix at 0930 SGT will be closely watched today. The street being nervous that China may follow Friday’s tariff jab with a very low fixing uppercut.

AUD and NZD are both 0.50 per cent lower with their high beta to China, and this theme will undoubtedly continue. In the same vein, USD/JPY has fallen again today to just shy of 105.00, reflecting safe-haven buying of JPY. Another theme likely to feature strongly in today’s session.

Equities

No matter which way you cut the cake, it is nearly impossible to construct a bullish, or even neutral scenario for equity markets today. With tariff-geddon announcements by both China and the U.S. either side of the Wall Street close on Friday, Asia will face repricing both into equity markets regionally.

Wall Street had big trouble in Little China, the S&P falling 2.60%, the Nasdaq falling 3.00% and the Dow Jones falling 2.40%. The Japan Nikkei is already lower by 2.20% with Australia’s ASX lower by 1.50% with other major regional markets still to open.

Less liquid regional markets such as Indonesia and Malaysia and Taiwan could see an outsized reaction as investors stampede for the door. Either way, by the day’s end, Asia is likely to have called for the waterboy and magic sponge many times as players go down injured.

Oil

United State’s oil was amongst the tariff targets, along with automobiles, of China on Friday. The hit to global growth aside, the reaction on WTI was outsized. Brent crude fell only 1.45% to $59.00 a barrel on Friday, but WTI collapsed by 2.70 per cent to $53.80 a barrel.

The Trump tirade and tariff-geddon retaliation, all post-Fridays close, has forced another leg down in prices with Brent and WTI futures both lower by nearly 2.0%. With tremours also shaking the EM currency and equity markets locally, black gold is going to look like black sold for the remainder of the session and into Europe.

Gold

Gold reigns supreme this morning, marking a six-year high by rallying an impressive $20.0 an ounce to $1549.00, having touched $1555.00 in early trading. It follows its 2.0 per cent gain on Friday following China’s tariff announcement.

Gold has indeed come into its own these last two months after a sleepy for half of the year. Likely because most investors never believed the trade war would go this far. Most investors never considered a hard Brexit a serious proposition either, and yet here we are.

Short of a material step back by both China and the U.S. on the trade front, and with bond yields plunging globally, gold’s price action will continue to remain constructive. The first signals of this were gold holding the $1500.00 region earlier in the month.

As the financial markets slip further into disarray as the two biggest kids refuse to share the toys, gold will benefit from continued safe-haven inflows. Initial resistance intra-day is at $1555.00 an ounce, the session’s highs. After that, the charts reveal no meaningful resistance until the $1600.00 region. Support lies at $1527.00 with long-term support continuing between $1480.00 and $1500.00.

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