Any optimism that had existed on Friday for a quick resolution to the US – Sino trade dispute had evaporated by Monday. Global stocks across the board dropped lower as China hit back and as investors fretted over the economic implications of the escalating US -Chinese trade spat.
Sentiment had been low all morning after Trump threatened China not to retaliate to the tariff increases. Risk aversion intensified when China announced that it will raise tariffs on US goods as from the first June. Riskier assets such as equities tanked, US treasury bonds jumped and flows into the safe haven yen increased. These developments come after the latest round of US -Sino trade talks concluded on Friday in stalemate with no plans for further negotiations.
The speed at which this trade spat has ramped again has caught the markets off guard. The Dow fell over 500 points on the open whilst the Nasdaq dropped 2.8%, as investors price in the potential fallout of the trade dispute. China targeted some of the biggest exporters from the US – Caterpillar (NYSE:CAT), Boeing (NYSE:BA), Intel Corp (NASDAQ:INTC).
With Trump now threatening 25% tariffs on all Chinese imports the impact on Chinese exports and the Chinese economy would be substantial. There is potential for the situation to get worse before it gets better. The markets would want to see an improved tone from Trump in order to stage some sort of recovery and given Trump’s unpredictable nature, the timing of that could be difficult to gauge.
Dax leads European bourses lower
In Europe the FTSE was holding up better than its counterparts. The FTSE was down 0.7%, compared to the DAX – the most China and trade war sensitive European index, which tumbled over 1.3%.
On the FTSE, Centrica (LON:CNA) led the gainers following a surprise 50% increase in revenue. Oil majors also featured on the leader board, tracing the price of oil higher.
Crude jumps 2.5% on Middle Eastern Tensions
Oil trade over 2.5% higher as escalating tensions in the Middle East overshadowed the US - China tit for tat trade dispute. 2 Saudi Arabian oil tankers were attacked in the Strait of Hormuz, one of the world’s most important oil routes. Tensions in the Middle East have been intensifying as US – Iran relations have deteriorated.
Traders are growing concerned that these elevated levels of tension could lead to a supply crunch. Oil supply is already tight amid continued OPEC production cuts, sanctions on Iran and Venezuela. We are seeing the demand concerns (US – China trade dispute) take a backseat to supply issues. As a result, oil is pushing back towards $63.50.
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