Equity markets tumbled across the globe on Wednesday, as investors digested a stepping up in trade tensions following threats from the White House of tariffs on an additional $200 billion worth on Chinese imports. Industrial stocks which are most prominent in the Dax and the Dow, were hardest hit, leaving the Dax nursing losses of 1.5% on Wednesday and the Dow off by 0.9% overnight.
Risk appetite was low, with extensive flows into US 10-year Treasuries, pushing the yield down to 2.84%, whilst boosting the dollar versus its peers. Commodity currencies were also deeply lower, supporting the greenback, so much so, that the dollar moved higher versus traditional safe haven the Japanese yen, whilst the stronger dollar also outweighed the haven appeal of gold, pushing the metal lower, not what we would necessarily expect given the risk off environment.
Commodities have been hit harder than equites in this latest raising of the stakes; base metals moved lower on demand concerns, copper suffered a 3% blow in the previous session and was off a further 0.6% overnight.
Oil Sinks 6%
What started as a slide in oil ended up as a 6% rout. It was the biggest one-day loss in 2 years for crude, as demand concerns combined with increased supply rocked the price. Given that China and the US together account for about a third of global oil demand, any slowdown in these economies on the back of a trade war would logically impact demand for oil and therefore its price, this is a rational fear and one that could see Brent take out support at $72.50 on news of a retaliation by China.
Optimism in Trading Patterns
Asian markets ignored the declines on Wall Street overnight, consolidating losses before moving higher, whilst Europe is following suit. The pattern that we’ve seen over the past 24 hours of losses, consolidation, followed by solid moves higher is the same that was witnessed following previous tariff announcements and one we are likely to see when China retaliates. The pattern points to a level of optimism in traders that trade tensions will ease through negotiations going forward.
Any retaliation by China will be a principal driving force in the markets today, potentially pulling commodities lower still whilst boosting the dollar.
US Inflation To Push Dollar to 95.00?
The dollar held firm overnight, keeping hold of its gains from the previous session, as investors switch their attention to US CPI data. Inflation in the US is expected to have increased in June to 2.9% year on year to a 6 1/2 year high, whilst core inflation is expected to have increased 2.3%-year on year firmly above the Fed’s target. Whilst this is not the Fed’s preferred measure of inflation, it will still be closely watched following a miss on average wages on the jobs report. A higher than forecast inflation print could see the dollar index take on 95.00. Meanwhile a surprise to the downside, could see the runaway dollar back under control.
Opening calls
FTSE to open 25 points higher at 7616
DAX to open 44 points higher at 12461
CAC to open 17 points higher at 5370