It has started to become increasingly clear in the last few days that battle lines are being drawn and positions staked out in what could be a significant face-off between the US and China with respect to a redrawing of the map when it comes to trade relations between the two countries.

For the most part investors had supposed that when all was said and done that the US’s bark would be worse than its bite, and that some agreement with China would eventually be reached, however given the tit for tat positions being staked out in the past few days some investors appear to be adopting the position of discretion over valour and locking in some profits, as concerns about a much deeper sell-off start to gain traction.

Investor caution does make sense given comments from Peter Navarro, President Trump’s trade advisor and author of “Death by China: Confronting the Dragon” who said that the US believed that they had the upper hand, saying China had much more to lose.

The tone and nuance of this remark is revealing in that it appears to acknowledge that there will be a cost to the US, but that the US administration is calculating that the cost to China will be much larger in terms of the hit to Chinese GDP relative to US GDP, which helps explain why Chinese markets have been battered in recent days. This stance may well also be based on the fact that while the US economy appears to be performing well, the Chinese economy appears to be slowing, recent retail sales numbers were at a multi-year low.

Whether that turns out to be the case remains to be seen, and there still remains a significant amount of time before the first set of tariffs kick in on the 6th July, while we don’t have a date for the latest set of tariff threats.

Further tariffs could take a while longer to outline and implement giving significant more scope for both sides to pull back from the brink, which probably helps explain why the fallout globally has been slightly more modest with some indices hit harder than others, with US markets finishing lower again last night, with the Dow closing lower for the sixth day in a row and wiping out its gains for the year.

In Europe the German DAX, a proxy for a trade war if there ever was one, has been hit the hardest given Germany’s heavy export bias, with the last three days wiping out most of this month’s gains, though we could well open higher this morning as a result of last night’s pullback from the lows in the US.

We’ve also seen some modest haven buying with US treasuries catching a bid along with the Japanese yen and Swiss franc, though gold struggled given the strength of the US dollar as expectations about future US interest rates continued to underpin the greenback, as the US dollar index hit an 11-month high.

Oil prices have swung sharply in recent days ahead of this week’s OPEC meeting in Vienna amidst speculation that a deal on easing the production cap has already been done between the Saudis and Russia, despite Iran rejecting any form of compromise when the cartel meets on Friday.

The Saudi’s have already indicated they are open to some form of increase while Russia wants a production hike of up to 1.5m barrels a day. Iranian oil minister Zanganeh has said he will leave Vienna on Friday before the meeting even starts which almost suggests that Iran’s wishes will be ignored, and some form of compromise will be arrived at which bypasses them. In which case its just a matter of waiting for the detail later this week.

EURUSD – while above the May lows at 1.1520, as well as trend line support from the 2017 lows, we remain at risk for a rebound back towards the 1.1720/30 area, with resistance also at 1.1640. A break below 1.1500 has the potential to open up a move towards the 1.1360 level.

GBPUSD – broken below 1.3200 and closing in on trend line support from the 2017 lows which currently comes in around the 1.3110 area. A break below 1.3100 opens up a potential move towards 1.2980. We need to push back above 1.3300 to retest the 1.3460 area.

EURGBP – still range bound with resistance just above the 200-day MA at the 0.8820/30 area with the recent lows at 0.8700 the next key support. A move through here opens up the 0.8640 area.

USDJPY – the reaction off the 111.00 highs found support at the 109.50 level yesterday and could head lower if we break below this area and retest the 108.70 area. While below these recent highs the risk appears to have shifted towards the downside.

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