As Gloves Come Off In Trade War, Markets Worry All The Adults Have Left The Room

If Donald Trump was aiming to inject further uncertainty into the outlook around global trade in an effort to goad the Fed into aggressive rate cuts, he’s certainly succeeded when it comes to engineering turmoil.

As tipped by large losses across Mideast shares on Sunday, the mood was risk-off to start the week with the offshore yuan diving to a new all-time low, the lira suffering a flash crash and the Aussie and kiwi coming under significant pressure.

The yen, meanwhile, hit a three-year high, with USDJPY falling through January flash crash levels to the lowest since November 2016. 10-year JGB yields dropped to -0.265%, again testing the lower-end of the BoJ’s YCC range. The yen would later reverse gains after Chinese Vice Premier Liu He said Beijing opposed further escalations with Washington.

Meanwhile, 10-year US yields fell to 1.4695% just after the Asia open. That’s the lowest since August of 2016. Earlier Sunday, Goldman said benchmark yields in the US could hit record lows in light of the trade tensions, and Deutsche Bank made a similar call on Friday.

Read more: Trade ‘Déjà Vu’ May Send 10-Year US Yields To All-Time Lows, Goldman Says

US equity futures obviously traded lower, although they stabilized a bit after the initial downdraft. All eyes will be on the PBoC to see what can be divined about Beijing’s intentions from the daily fixes this week. Monday’s fix was on the strong side, signaling a desire to avoid further tumult – for now anyway.

Analysts have dropped all pretensions to politeness when it comes to describing the situation.

“It appears China is no longer confined to its commitment to be ‘the adult in the room’ [and] we expect China to no longer resist public suggestion to boycott US brand names”, BofA said over the weekend, adding that when it comes to the currency, the PBoC “may not want to see exchange rate expectations de-anchored, [but] it may feel less obligated to use official FX reserves to support the yuan”.


Trump is clearly concerned. “My Stock Market gains must be judged from the day after the Election, November 9, 2016, where the Market went up big after the win, and because of the win”, he flailed on Twitter as US futures sank. “Had my opponent won, CRASH!”, he went on to speculate.

In part because of the trade war, “CRASH!” is just what everyone is concerned about. Indeed, it’s been a harrowing month thanks almost entirely to the tariff dispute.

Rhetoric from Trump officials on Sunday suggests the president wishes he would have hit Beijing even harder on Friday afternoon and Global Times editor Hu Xijin has been a busy man on his own Twitter account.

“China has ‘lost’ the US already: all-round high tariffs, Huawei ban, political hostility, Hong Kong, Taiwan… We’re facing a completely different United States”, Hu said Saturday, before warning that the Chinese “have nothing more to lose, while the US is just starting”.

He also mocked Trump’s threats to force US companies out of China. “President Trump is welcome to relocate GM, Ford and other automakers back to the US”, he said, adding the following:

As far as I know, China is their No.1 market, they can give up their market to BMW, VW and Toyota. Go back to the US, let each American family have 20 cars.

On Sunday, both Steve Mnuchin and Larry Kudlow insisted Trump has the authority to compel private enterprise to abandon foreign operations.

BofA said Trump’s Friday tweets were significant for failing to distinguish between China and Xi himself. “The fragile friendship between US and China top decision makers is being tested”, the bank wrote, in the same note mentioned above. “In his tweet on August 23rd, President Trump asked ‘who is our bigger enemy, Jay Powell or Chairman Xi’? and this is the first time that Trump no longer separated the trade war from a more specific relationship with President Xi”.

For the bank, “these new remarks signaled a potential tipping point towards full-blown trade war between the two nations”.

As far as the tariffs are concerned, US consumers are on the verge of feeling the heat. Although the administration’s decision to delay duties on some consumer items until December 15 helps, recent escalations suggest the odds of those levies being averted are lower and besides, the tariff hike announced on Friday will have an impact. In the visual below, the $112 billion and $160 billion tranches represent the goods that will be taxed at 15% from September 1 and December 15, respectively.

Long story short, the new levies fall disproportionately on consumer items.

All of this is extremely foreboding for a fragile global economy. “Global PMIs remain subdued and US manufacturing is slowing down with the rest of the world, while global trade growth remains close to recent multi-year lows amid the ongoing trade war”, Barclays wrote Sunday, warning that “markets continue to face recession warning signals, focusing on the inversion of the yield curve amid the rally in fixed income, New York and Cleveland Fed recession probabilities that are at, or near, the highest since the Global Financial Crisis, and the lack of momentum in equities”.

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One thought on “As Gloves Come Off In Trade War, Markets Worry All The Adults Have Left The Room

  1. It’s gonna be harder and harder to shake the recession word from news in the next several months!

    The truth is that Trump’s base did not elect him. His base brought him close, but what paved the road for the inside straight that secured his majority in the Electoral College, was a late swing away from Hillary among suburban women, middle-aged Hispanic men, those with some college but not a four year degree, and independents, combined with a drop in the black turnout. Trump is weaker today than he was in November 2016 in each of those demographic subsets, and the economic uncertainty and distress in the bond markets are affecting the investment accounts of those older voters Trump needs to have any chance of mounting a comeback.

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