After months of waiting Donald Trump finally dropped a hint suggesting that Chinese negotiators have been dragging their feet in meeting US demands.
On Saturday, the US president threatened to enforce higher tariffs as trade talks stall. Financial markets immediately adjusted to the downside at Sunday/Monday opening with the Japanese yen appreciating as much as 0.75% against the greenback. In the equity market, indices sharply dropped with futures on the S&P 500 opening more than 1% lower – front month contracts slid as low as 2,883 points.
Across the Atlantic, futures on the Euro Stoxx 50 gapped 0.75% to 3,433 and continued to grind lower to reach 3,381 points. EUR/USD suffered a moderate sell-off as the single currency returned quickly to Friday close after sliding 0.40% during the Asian session. Looking at both markets, it seems that FX traders were more conscious of the risk of failure of the negotiations as the USD appreciated only moderately against its peers, while overall volatility remained low.
On the other hand, equity investors were overly optimistic, as they didn’t even consider the possibility of failure. The VIX is up 42% on Monday morning as it jumped to 18.30%.
It was only a matter of time before the truth came out: the negotiations between China and the US are not going particularly well despite lots of enthusiastic tweets from Donald Trump and positive comments from its administration. In view of most recent events, it looks like President Trump greatly overestimated the grip that he has on China. According to the latest news, it seems that Chinese officials are still traveling to the US for the “final” round of talks.
However, it is hard to tell whether it was just a threat aiming at forcing China to make real concessions or measures that will be implemented soon. We tend to favour the second option. Nevertheless, it may take a couple of days for the equity market to stabilise. After such a long and sustained rally, what could be more normal?
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