Trade war anxiety

4 minute read


Trade, growth, interest rates: these were the broad headings that framed market opinion on Monday. The day began in Sydney with investors uncertain how China would respond to the US administration's escalation of protectionist tariffs last week. It ended with them nervous about what would come next in the process of mutual retaliation. The mood was decidedly risk-off, with equity, commodity and energy prices all lower and a Fed rate cut this year fully priced into interest rate futures.

Beijing's retaliatory tariffs were met with a US proposal to tax a further $300 billion of Chinese goods. It looked very much as though the US administration was digging in for a protracted struggle, and few investors could see an economic upside. They were no wiser than they had been on Friday about the implications for the USD, given that the mood could switch at any instant on the next Trump tweet.


With no economic data and no comment from the European Central Bank on Monday the EUR had to make what it could of its quasi-safe-haven status.  To an extent it benefitted from the market's concentration on the Sino-US trade altercation. However, investors could not fail to be aware that the White House is preparing to turn its attention to Europe once the Chinese situation has been sorted out - for good or ill.  

This morning's Euroland ecostats were rather less helpful than investors had hoped. Consumer price index data from Germany and Spain were fair enough at 2.0% and 1.5%. A 0.3% monthly decline in euro zone industrial production was no worse than expected.  But ZEW's survey of investor confidence produced a surprisingly mixed result. The current situation improved by more than expected, from 5.5 to 8.2, while economic sentiment plunged five points to -2.1. It made little difference to the EUR, which is 0.1% ahead on the day.


Until midday the Loonie looked unruffled, tracking sideways against the USD. It reacted badly - as did most "risky" currencies - to news that the trade war might escalate further. It is 0.2% lower on the day.

In the absence of any Canadian economic data an important function of the CAD's progress was the shape of oil prices. After moving higher during the early New York session WTI crude took a dive when the trade narrative worsened. The CAD was alongside it all the way down.


Unusually, the GBP kept close formation with the CAD and WTI crude. The three fell together, with sterling coming unstuck as a result of a head-and-shoulders chart formation in GBP/USD. Losing ground initially because of the growing risk-off mood, the pound's decline was extended when it crossed the "neckline" support, opening its path to the south.

This morning's UK employment data were vaguely helpful to the GBP but not unassailably so. There were no complaints about the rate of unemployment, which at 3.8% was the lowest since 1974, and a 24.7k rise in total jobless claims was close to forecast. However, basic wage growth ex-bonuses once again slowed by more than expected, from 3.4% to 3.3%. Total wages were up by 3.2% on the year instead of the 3.5% seen a month ago. The GBP is 0.5% lower on the day and the worst performer among the majors.


Japan's position between America and China means it is not always the safe-haven currency of choice when those two economic giants are squabbling.  The JPY is unchanged on the day while the CHF is 0.2% higher against the USD. Moreover, the yen's trend since New York's mid-session yesterday has been downwards.

Japanese data did not figure in investors' decision-making. Bank lending grew by 2.4% in the year to April, as forecast and the balance of trade surplus widened in March.

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