Global stocks sold off heavily yesterday as trade tensions between the two largest economies in the world, the US and China, dominated the headlines.
The Chinese yuan fell below the 7 mark against the US dollar, and that rattled traders as they saw it as a deliberate economic retaliation against the US in response to the tariffs that were announced last week. The Chinese central bank has a track record of supporting the currency, and in a roundabout way, their lack of intervention in the market, was seen as an intervention – they allowed the market to push the currency down.
President Trump accused the Chinese of currency manipulation, as a weaker yuan will help with their exports. In 2015, the People’s Bank of China intentionally devalued the yuan as the economy was cooling down, and that sparked a huge sell-off in worldwide stocks, and should the yuan fall further, it might play on traders’ minds that something similar might happen. Beijing also instructed state owned companies to halt importing US agricultural goods, and that added to the deteriorating relationship between the US and China ,and in turn it hit stocks hard.
Traders were in flight to quality mode and the Japanese yen, Swiss franc, and gold benefitted from the sharp declines in equities. Gold’s inverse relationship with the US dollar helped the metal reach a fresh six year high. The Fed lowered interest rates last week, and the latest non-farm payrolls update was reasonably positive, but given the renewed trade tensions, traders are expecting the Fed will cut rates again later this year, and that weighed on the greenback.
The energy market suffered too as traders are worried the escalated trade spat between the US and China will hurt global demand for oil and gas ,as WTI, Brent crude and natural gas all suffered yesterday. The energy market can act as a barometer for the perception of the health of the global economy, and the economic fight between the two largest economies in the world is weighing on global sentiment.
The major economies of the world revealed their latest services data, and by-and-large the reports weren’t too impressive. The Chinese report cooled to 51.6 from 52. The French update was 52.6, which was slightly ahead of the 52.2 forecast. The German reading was 54.5, and keep in mind the previous reading was 55.4. The UK announcement was a pleasant surprise as it was 51.4, which topped the 50.2 forecast. The British reading was the highest in 10 months, but a reading in the low 50’s is still minimal growth. The US ISM non-manufacturing PMI update cooled to 53.7 from 55.1 in June. Seeing as global manufacturing is having a tough time, it not exactly encouraging that services are subdued.
Overnight, stocks in Asia endured heavy losses as the US-China trade dispute intensified. Beijing confirmed that it is imposing a ban on state companies from purchasing US agricultural goods, and it will ‘not rule out’ imposing tariffs on imports of farm goods from the US. The Chinese central bank fixed the midpoint of the yuan at 6.9683 – which is stronger than the 7 mark, but traders will be keeping an eye on the yuan as it is clearly a tool in China’s arsenal against the US.
The Reserve Bank of Australia (RBA) kept rates on holds at 1%, meeting forecasts. The central bank trimmed this year’s growth forecast to 2.5% from 2.75%.
At 7am (UK time) Germany will reveal the factory orders report and economists are expecting 0.5%, which would be a huge bounce back from the 2.2% fall in May.
The US JOLTS update will be released at 3pm (UK time) traders are expecting a reading of 7.31 million.
James Bullard of the Federal Reserve will be speaking in Washington DC at 5pm, and the central banker is known to hold dovish views.
EUR/USD – bounced back at the end of last week, and if the bullish move continues it might target 1.1300 – 200-day moving average. If the wider downward trend continues it might target the 1.1000 area.
GBP/USD – has been driving lower since mid-March, and if the bearish move continues it might target the 1.2000 region. The 1.2400 area might act as resistance.
EUR/GBP – has rallied for over two months, and if it holds above 0.9089, it might bring 0.9300 into play. A move to the downside might put 0.9000 on the radar.
USD/JPY – has been in a down trend since late April, and if the bearish move continues it might target the 104.63 region. Resistance might be found at the 50-day moving average at 108.16.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.