Global investors spared no hesitation to flee into safe havens and dump equities against the backdrop of an escalating trade war between the US and China.
US equities suffered significant, broad-based selloff last night as China retaliated with tariffs and the situation shows no sign of ending anytime soon. Gold gained over 1.3% to above US$ 1,300, reaching its highest level seen since mid-Apr. USD/JPY slid to 109.2, a three-month low as yen is widely viewed as one of the safest currencies during rainy days.
Technically, the S&P 500 and the Hang Seng Index have all entered into a bearish trend, as a flip down of their SuperTrend (10,3) confirmed a trend-reversal. Immediate support for S&P 500 can be found at around 2,802 points (23.6% Fibonacci Retracement) but the correction might not stop here. The bearish ‘long range bar’ formed yesterday suggest more downside ahead. The Hang SengIndex may strike through an immediate support at 28,000 and the next major support can be found at around 26,600. For day traders, they can refer to USD/CNH 5 mins chart for Hang Seng’s movement in the same period, due to their strong negative correlation.
Sector wise, Information technology (-3.71%), consumer discretionary (-2.95%), financials (-2.87%) and industrials (-2.84%) were among the worst performers whereas utilities (+1.11%) and real estate (+0.00%) were the only two sectors in positive territory due to their defensive nature and a lower interest rate prospective. Heightened uncertainty and the adverse economic impact of trade tariffs have led the futures market to price-in a 76% probability of a Fed rate cut by end of 2019, rising from 41% seen a month ago.
Chinese offshore yuan, CNH, tumbled over 500 bps to 6.912 against the greenback yesterday. The fast depreciation of CNH reflected the fragility of China’s export sector against heightened tariffs and raised concerns of capital outflow- which is usually self-reinforcing with a depreciation outlook.
US trade officials said the higher tariffs would apply to products exported from China starting on 10th May but not goods already in transit. This gives US and Chinese negotiators a window of two to four weeks to hammer out a deal before the bulk of the pain from the 25% tariffs hit US consumers and businesses.
The uncertainty created by the trade war has led to businesses delaying investment and expansion plans. Street sees the current 25% tariffs on $ 200 billion goods will bring down China’s GDP growth by more than half a percent over the next 12 months, and over one percent if additional tariffs hit the other US$ 325 billion goods.
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