Trump Tweet to terrify Asia

President Trump has seriously raised the stakes in this week’s round of the US-China trade talks in Washington, threatening to slap a 25% tariff on a mind-boggling USD525 billion of Chinese goods by this Friday. The President has voiced his displeasure at the slow pace of the talks and apparent backtracking by Chinese officials while noting that the US economy is doing very nicely thank you, even with the tariffs that are presently in place.

It’s hard to argue with Trump on this point given last Friday’s sparkling non-farm payroll and unemployment data. Workforce participation, wage growth and services all missed slightly but were only minor blots on the smooth running of the big-block V8 engine that is the US economy at the moment.

I’m sure the Chinese gave up trying to use game theory to model the President’s possible reactions long ago, as the trade talks have progressed slowly over the past months. Trump has taken the proverbial sledgehammer to the walnut this morning and the only two words likely to be on the minds of traders and investors this week are “trade talks”. The US remains in its strongest negotiating position with China in decades and is making it clear they intend to use it to fundamentally reset the asymmetric way China in which does business with the world. If there’s one positive financial markets can take from the President’s social media bombshell, it is the US is not going to take “easy wins” to get a deal over the line.

Friday’s data is likely to be consigned to the dustbin pretty quickly this morning as Asian markets deal with the here-and-now of the trade implications from Trump’s tweet. The reaction is not likely to be good, with early currency trading showing safe-haven buying of Japanese yen (JPY) and selling off Australian (AUD) and New Zealand Dollars (NZD). Both the antipodeans have a high beta to the China economy.

Both Australian and New Zealand have interest rate decisions this week. Although I expected increasingly dovish noises to come from both, I expected both to hold pat for now. A deterioration in the state of the US-China trade talks may well be enough for New Zealand, in particular, to pull the rate-cut trigger.

FX

AUD and NZD are already around 0.40% lower in Monday’s twilight- zone early trading. The AUD has ominously given back all its Friday gains and slipped back below the 0.7000 support level against the greenback, currently trading at 0.6990. The Kiwi lies at 0.6620, above the important 0.6600 region for now. As the week starts, both are likely to find willing sellers on any rally due to their high China correlation and potentially dovish central banks.

The US dollar fell on Friday across the board as traders booked profits ahead of the weekend. That situation is unlikely to last, and the greenback may rise quite sharply in trading today, with thinning liquidity from Japan’s Golden Week holiday. Regional currencies are likely to suffer en masse as traders and investors head for the exit door and the safe-haven of the greenback, US bonds and possibly gold.

Equities

Wall Street’s excellent Friday session is likely going to be forgotten. Markets are concentrating on the possible breakdown in US-Sino trade talks. With so much of the region’s fortunes closely intertwined with China, we could see a sea of red as regional stock markets open today. Early electronic trading of the S&P 500 mini contracts indicates a fall of 1.68% already.

Investors globally will probably sell first and ask questions later with developed market government bonds benefiting as investors rotate out of equities and wait for the dust to settle. It shouldn’t be a surprise, therefore, if both US Treasury and German Bund’s rally strongly and bond yields fall.

Oil

Oil marked time on Friday, as both Brent Crude and WTI finished almost unchanged at USD70.85 and USD62.00 a barrel respectively. Given the possibility of a colossal ramp-up of China tariffs by the US by Friday, it’s hard to envision anything but oil being heavily sold in Asia today.

Early electronic trading of WTI shows a near 2% fall already to USD60.50 a barrel. Given the strength of oil’s rally on global recovery hopes, and the extended long positioning remaining in both contracts, an extended sell-off in Asia could quickly turn to panic.

President Trump has been complaining about the price of oil being too high. He may be about to get his wish.

Gold

Every cloud has a silver – or in this case gold – lining, however, and President Trump’s tariff threats may well be a boon for the yellow metal. Having made a comeback on a weaker dollar last Friday, gold is poised to benefit strongly from safe-haven flows as investors dump stocks and rotate into bonds and precious metals.

Early trading indicates a rise of USD6 to USD1,285.00 an ounce, and given the China tariff bombshell, gold should continue to enjoy safe-haven support throughout the Asian session.