The FTSE tanked in early trade and remained depressed across the session as risk-off dominated at the start of the week.
China devaluing the yuan sub 7 versus the dollar for the first time in a decade to counteract the US tariff increase is the clearest indication yet that the trade war is evolving into a currency war. Furthermore, Beijing is telling state buyers to halt the purchase of US farm products, both moves that will infuriate Trump.
The message is loud and clear. China’s retaliation to Trump’s additional tariffs shows that China has no intention of surrendering to the US and even goes a step further showing that China too is capable of escalating tensions. China is sounding more willing than ever to call Trump’s bluff and that is unnerving traders.
Gold shines in a risk-off environment
Riskier assets such as equities are firmly out of favor. Stocks across the board plummeted on Monday, whilst flows into safe havens such as gold and the yen have increased. Gold reached multi-year highs, soaring over $25 dollars across the European session. Last week’s Fed rate cut in addition to increased geopolitical tensions has created an environment in which gold bulls are firmly in control. A close above $1453 today looks inevitable, potentially opening the door to a move towards May 2013 high of $1488.
Pound pares losses as service sector activity rises
The pound recovered from an early slip lower thanks to better than expected service sector data and weakness from US stats. The UK service sector activity unexpectedly improved, marginally in July off stetting concerns over the manufacturing and construction sectors. Service activity rose to 50.2 in July, the highest level since October last year. Whilst this news was sufficient to pick the pound up from this morning’s lows of $1.21, the reality is this is just a smokescreen. The service sector is fundamentally weak owing to Brexit and the slowing global economy, we expect July’s tick higher to be an anomaly rather than the start of a new trend.