Risk underperforms as trade war goes from bad to worse
|Market movers today
Markets will watch out for further trade war escalation and 'tit-for-tat' headlines, after China on Friday announced tariff hikes on US imports and President answered in kind.
In Europe focus is on the German Ifo index for August. Last week's PMI figures finally signalled some stabilization, but the ZEW survey gave a different signal. We think the battered German economy is not yet out of the woods and hence look for a further deterioration in today's Ifo expectations and current situation assessment on the back of ongoing geopolitical uncertainties.
In the US, preliminary capex orders in July are due, which will be interesting in the light of the ongoing manufacturing slowdown and trade war uncertainty. It seems that many companies are reluctant to invest in the current environment.
Selected market news
The US-China trade war went from bad to worse to an unprecedented level on Friday with a tit-for-tat escalation of imposing tariffs from either side of the front. On Friday afternoon, China announced countermeasures to Trump's 10% tariffs on USD300bn of Chinese goods. Beijing will add 5-10% tariffs on USD75bn of US imports on 1 September and 15 December (see China weekly letter here ). Trump responded violently. The president 'ordered' US companies to find an alternative to China, and said that he would respond to China's tariffs in the afternoon (US time). After US markets closed, Trump announced that he would raise tariffs by 5% on all US imports from China, which amount to around USD550bn. The US will raise tariffs on USD250bn of Chinese imports to 30% from 25% on 1 October. The 10% tariffs on USD300bn of Chinese imports will be raised to 15% on 1 September and 15 December. With the latest tit-for-tat escalation, it's nearly impossible to say how the end game of the trade war will play out. Near term, we should watch out for: a) China's response to Friday's tariffs, b) China's countermeasure to the blacklisting of Huawei and its affiliates, which Beijing says that it will announce soon, c) information about trade talks set to take place in September, and d) signs that China considers imposing restrictions on exports of rare earth metals. We expect that China will respond to the US's blacklisting of Huawei and Friday's tariffs. See also Harr's view: Lower equities, higher volatility on trade war escalation .
In Powell's much awaited Jackson Hole address he did not pre-commit to more easing as expected, which in other words means an unchanged Fed narrative. He repeated the easing bias through "will act as appropriate to sustain the expansion". We believe that in particular Powell addressed two very important items; 1) the worsening trade war (Powell referred to the period since the July FOMC meeting as 'eventful') 2) the global economy has shown more weakness since the July FOMC meeting.
The Asian session points to another risk off mood to dominate financial markets after the escalating trade war with equities down around 2. US 10Y touched 1.48%, which has not been seen since late 2016.
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