Equities suffer a winter cold

European and North American stock markets were cremated overnight, following weak Chinese and European/German data highlighting that both economies are slowing, exacerbated by the ongoing US and China trade war. This was in sharp contrast to the previous North American session where a postponement of some US tariffs put a spring-like feel into the stock markets. That summer feeling continued through Asia, despite Chinese Industrial Production falling to 17-year lows as the tariff tenderness took the edge off the data. Autumn arrived early in Europe as Euro-zone and German GDP missed badly to the downside. Winter came blizzard-like to North America as traders took fright at slowing growth in two of the big three, stampeding for the exit door on stock markets. The S&P 500, Dow Jones and Nasdaq all fell around 3%.

Even as stocks were being unceremoniously crushed, the hand wringing was largely reserved for the bond markets where the US – and UK – yield curves temporarily inverted on the two- to ten-year tenor. As I have previously yelled from my soapbox, falling bond market yields have been signalling a global economic slowdown all year; even as equity markets scaled new heights. With trillions of dollars of government debt now in negative or zero yield territory, stock markets have been blissfully denying reality for some time. Negative yields and a procession of Central Bank easing around the world are not an indicator of positive future growth – a reality that global equity markets are now having to accept.

The now drawn out US-China trade war has sapped investor confidence. It is now threatening to turn what would have been an orderly and gentle slowdown, after ten years of uninterrupted growth, into something potentially much more aggressive. China and Europe are now in the outpatients’ department, leaving the hitherto untouched United States as the only one of the big three blocs not to have caught a cold. This makes this evening’s US Retail Sales data much more important than usual. With a month-on-month growth expected at 0.30%, a bad miss to the downside now has the potential to shatter any potential confidence remaining. This could cause an out-sized adverse reaction across global markets, given the fragility of confidence today.

 

Currencies

Currency markets were surprisingly quiet as the dollar index eked out a 0.21% gain to 98.02. Haven currencies, the Japanese yen (JPY) and Swiss franc (CHF) gained against the greenback. Emerging-market FX was surprisingly resilient because the stock market meltdown was offset by falling US yields. Quite a bit of global slowdown action may already be priced into emerging-market FX, although this may not remain the case for long.

Over in Europe, the British pound (GBP) was broadly unchanged at 1.2050, supported by flows into the gilt market. The euro (EUR), however, wilted before the might of the dollar, falling 0.35% to 1.1130 as the realisation dawns that Europe, and not the UK, is the actual “English Patient.”

 

Equities

Asian stock markets are a sea of red this morning, which should come as no surprise. Japan and China are both more than 1% down with Australia especially hard hit, falling 2% this morning due to its high-beta to China and regional growth. This situation will likely continue through the session.

President Trump’s offer to assist China in mediating its Hong Kong dispute almost certainly had President Xi spilling his tea this morning. The offer is unlikely to provide any solace to regional stock markets, where attention is firmly focused on the fate of the big three and nervously awaiting tonight’s US data.

 

Oil

Oil suffered a double whammy overnight, giving back almost all the previous session’s gains. Profit-taking in Asia capped black gold yesterday before the China- and Europe-induced global growth scare pulled the rug from under them. An unexpected rise in US crude inventories was the nail in the coffin, with Brent Crude falling 3.30% to USD59.25 a barrel and WTI plummeting 3.50% to USD55.10 a barrel.

Both contracts are down more than 0.50% in Asia, and it’s unlikely we will see any profit-taking buying to support them today. The stubbornly high US inventory levels are a concern, but it is the economic health of the US, China and Europe that will continue to make black gold look like black mould.

 

Gold

Gold sent a strong haven signal to the markets on Tuesday night, which (almost) the entire world chose to ignore in the Trump tariff afterglow. That signal was gold’s stubborn refusal to fall by more than a token amount, remaining above USD1,500.00 an ounce. This implied more cynical heads thought of Tuesday’s asset rallies as more theatre than fact, and so it came to pass.

With bond yields plummeting and equities in freefall, gold rallied USD16 to hit USD1,518.00 an ounce overnight and continues in that theme today, rising 0.35% to USD1,523.00 in Asian trading. The technical picture suggests that gold has consolidated nicely above the USD1,500.00 region and may be poised for further gains. The sea of red in asset markets globally over the last 24 hours may reinforce this view.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities.

Opinions are the authors — not necessarily OANDA’s, its officers or directors. OANDA’s Terms of Use and Privacy Policy apply. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Analysis feed

Latest Forex Analysis

Editors’ Picks

EUR/USD falls off the highs amid trade wars, weak German figures

EUR/USD is falling toward 1.1100. The German IFO Business Climate dropped to 94.3 points, below expectations. Markets are concerned by the intensifying US-Sino trade wars.

EUR/USD News

GBP/USD consolidates amid Brexit uncertainty

GBP/USD is trading below 1.2300, consolidating its gains. The UK and the EU have been blaming each other for a potential no-deal Brexit. US-Sino tensions are in play as well.

GBP/USD News

USD/JPY recovers farther from multi-year lows on Trump’s positive trade-related comments

The incoming positive trade-related comments dented the JPY’s safe-haven demand. Improving global risk sentiment helped the pair to recover around 150-pips intraday. Investors now look forward to the US durable goods orders data for a fresh impetus.

USD/JPY News

Forex Today: Trade wars paint markets in red, Brexit looks worse, and central banks are limited

Here is what you need to know on Monday, August 26th: The US-Sino trade war is painting global markets in the red. The US dollar is losing some ground to major currencies as yields plunge, while it gains against commodity currencies. Gold is rising and oil is falling.

Read more

Gold retreats from multi-year tops, fills weekly bullish gap on positive trade headlines

Gold extended its intraday pullback from fresh multi-year tops and dropped to fresh session lows in the last hour, filling the weekly bullish gap. The US-China trade tensions escalated further.

Gold News

Majors

Cryptocurrencies

Signatures