Today’s trading activity has had a very 'risk off' flavour to it, as concerns about further escalations in the China/US trade narrative turned very quickly into reality, after China announced a raft of new tariffs on over 2,400 of US goods.

With the EU also threatening its own retaliation if President Trump implements tariffs on EU autos at the end of this week, stocks have seen valuations put into the paper shredder, with large falls across the board.  

Europe

The biggest fallers have been in the German DAX, particularly since there is some concern that US authorities may turn their attention to the EU at the end of this week, specifically in the auto sector. These companies have seen the biggest declines on the DAX, with Daimler shares down the most.

Steel maker ThyssenKruup has fallen the most after the collapse of its Tata Steel joint venture refocused investor attention on the problems of the underlying business. While it is the biggest faller on the DAX, it hasn’t reversed the gains that we saw on Friday, which probably came about as a short-covering rally.

In the UK Metro Bank shares plunged to new record lows as it continues to wrestle with the problems brought about by the disclosure of a mis-reporting of its financial risk weightings, with respect to how its commercial property, and buy-to-let loans were classified.

The bank confirmed this morning that the capital raising was well advanced, however the shares have continued to come under pressure, falling below 500p and dragging the bank's market capitalisation below the £500m level. The misclassification meant that the bank was undercapitalised in terms of risk weighting, and in order to improve that weighting, would have to either raise more capital, or sell off some of the loans in question.

Not surprisingly shareholders are furious, having already been tapped for £300m last summer, and while the bank has announced this morning that the £350m capital raising is well advanced, they haven’t answered any of the questions around why the error happened in the first place. This clearly raises questions over the bank's risk-management procedures, as well as its corporate governance, something that investors are likely to raise later this month at the AGM, particularly since the error was only picked up by the Bank of England.

In order to restore confidence in the wholesale governance of the bank, it is highly probable that shareholders will insist on some management changes as a quid pro quo for any new capital, with chairman Vernon Hill, as well as CEO Craig Donaldson, in the firing line of some investors, on the back of a share price dive from £35 12 months ago. Today’s share price declines make it clear that the bank is struggling to restore confidence in its rebuilding plan, which raises the question as to whether a change of leadership is needed to turn sentiment around.

Among the best performers, we&rsquo ve seen Centrica shares rally, albeit from multi-year lows, with CEO Ian Conn’s position still under scrutiny after overseeing a share price decline over the last 12 months of over 35%, with most of that decline coming since the beginning of the year.

While the company has blamed a difficult trading environment and the loss of 20,000 consumer accounts, the share price declines have inevitably raised questions about Mr Conn’s remuneration packet, which has gone up at about the same rate in percentage terms as the share price has declined. The uncertain outlook has raised concerns that the dividend may have to be cut, given that it is well over 10%, though this may well already be priced in given the falls in the share price already seen this year.

Royal Dutch Shell is also higher on the back of firmer oil prices.

US

US markets opened sharply lower this morning, reversing the big gains seen on Friday on the back of China retaliation, which could bring the prospect of further 25% tariffs on another $300bn worth of Chinese imports much closer into view.

For most of this year markets have been rising on the prospect of a likely deal, and now are faced with the prospect that any deal is further away than ever. As if to hammer home how quickly this narrative has changed, China this afternoon announced they would be raising tariffs on some $60bn worth of US goods from 1 June, at a rate of 25%. As a result a whole host of China-exposed stocks have seen their share prices crushed, with Tesla shares hitting their lowest levels in over two years.

The Dow Jones industrial average has also slid sharply hitting its 200 day MA for the first time since February this year, with the US FANG+ index leading the losses, down nearly 4%. Apple shares have come under pressure as a result, as investors weigh up the prospective hit to the company’s profit margins, especially in the China region. Just to compound the tech giant's woes today, the US Supreme Court found against the company in an iPhone app anti-trust suit, helping to send the shares below the 200-day moving average (MA) for the first time since April, and to its lowest levels since the end of March. Boeing shares have also dropped after China said it would look at reducing the number of orders it made with the company.

Uber’s problems also continued today with the shares sliding below $40, on its second day of trading, as scepticism over its valuation weighed on risk appetite. With US markets under increasing pressure and the outlook for earnings likely to be much more closely scrutinised, the hunt for value is likely to be much more forensic. This looks like bad news for a lot of this year’s tech IPOs, which have helped US markets push to new record highs this year, as investors look at the disconnect between revenues, profits and market capitalisation.  

Lyft shares have also dropped on the open, falling below $50 for the first time since its IPO at $72 back in March, while Pinterest and Zoom Video Communications have also fallen sharply.

FX

The Japanese yen has continued to push higher on the back of today’s escalation in the trade war between the US and China.

The Australian dollar has suffered the most, slipping back towards last week’s lows. With an economy closely correlated to the Chinese economic cycle as well as commodity demand, the Australian economy is most closely exposed to further China/US trade tensions. The Chinese yuan has also slid against the US dollar, moving through the 6.90 level and its lowest level since last December

The US dollar has also come under pressure, along with US yields, as safe-haven buying in treasuries outweighs any inflation concerns that higher tariffs might bring about.

Commodities

Gold prices have ticked higher in the wake of today’s trade war escalation, pushing above last week’s peaks, towards $1,300 an ounce and through the 50-day MA at $1,295, as investors move into the safe-haven of the yellow metal.

We’ve also seen big moves happening in the cryptocurrency space, with large gains in ripple, bitcoin and rthereum. Bitcoin prices have hit their highest levels last August, while ethereum prices have also surged, breaking above the 200-day MA for the first time since June last year.

Crude oil prices have edged higher with Brent prices hitting a one-week high as investors fret about the escalating tensions in the Middle East, and the presence of a US carrier group led by the USS Abraham Lincoln. Reports from Saudi Arabia alleged that two of its tankers were attacked off the coast of the UAE haven’t helped either.
 

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