Trade war-inspired risk aversion has swept across financial markets in response to the latest clash in Trump's trade war but while the reaction in forex markets has been subdued, equities have taken a hammering as investors seek to sort rumour and reality.
"The story that seems to be the driver across markets is this latest supposed threat from the US side to restrict inbound investment in key industries. This was a widespread report and then towards the end of yesterday's session we saw US denials that it was aimed specifically at China," says John J Hardy, Saxo's Head of Forex Strategy.
However, even though this latest twist in the trade saga has triggered a wave of risk aversion, the reaction in FX markets was rather muted, and, Hardy says, the Japanese yen is likely taking its cues from US yields rather than trade tiffs for now. "In the longer term, a trade war is definitely a weak-dollar story and we look for an eventual transition back to dollar weakness. The question here locally is whether that is now or if that would be a bit premature," Hardy says.
But while the dollar seems to be ticking along in cruise control (for now), real pain is being felt in equity markets with Asia having tracked Wall Street's dive lower yesterday. "What an ugly session for equities," says Peter Garnry, Saxo's Head of Equity Strategy, adding that the CSI 300 is in bear market territory, Chinese stocks are taking a beating and emerging markets are under intense pressure.
Commodities, too, are still held captive by the trade war fears though the general risk off sentiment is failing to ignite gold as it is burdened by a deteriorating technical outlook, reports Saxo's Head of Commodity Strategy, Ole Hansen. A "death cross" (where the 50-day moving average falls beneath the 200-day one) on the chart is attracting quite a bit of interest, Hansen notes.
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.