China Retaliates against the US with Higher Tariffs

Market sentiment was hit again yesterday, as tensions between the US and China over trade intensified. Trump warned China not to retaliate over Friday’s tariff hike as this will only get things worse. However, the nation defied those warnings and officially announced that it would proceed with higher tariffs on USD 60bn worth of US goods from June 1 st. As for today, apart from headlines over the US-China saga, we will also keep an eye on the economic calendar, with Sweden’s inflation data for April and the UK employment report for March scheduled to be released.

Markets Trade in “Risk Off” Manner as China Hits Back

The dollar traded mixed against the other G10 currencies on Monday and during the Asian morning Tuesday. It gained against GBP, AUD, CAD and NOK in that order, while it depreciated against CHF, JPY and EUR. The greenback was found virtually unchanged versus NZD and SEK.

Once again, the strengthening of the safe-havens and the weakening of the commodity linked Aussie suggest that investors’ morale was hit again, despite the small relief on relatively sanguine remarks in the aftermath of Friday’s trade talks between the US and China. Indeed, equities opened Monday with negative gaps and continued drifting south throughout the day, as anxiety over the prospect of a trade deal returned into the market. Major EU and US indices were a sea of red, with the negative sentiment rolling into the Asian session Tuesday.

The initial catalyst was a Saturday tweet by US President Trump, who said that any deal would become “far worse” for China if it has to be negotiated in his second term, as well as China’s response that it will not accept the terms being proposed by the US in trade negotiations. On Monday, Trump also warned China not to retaliate as this will only get things worse, but the nation officially announced that it would proceed with higher tariffs on USD 60bn worth of US goods from June 1 st, which fueled further the already heightened concerns over whether the two nations can indeed reach an accord. That said, Asian indices came off their lows following Trump’s comments that future negotiations “are going to be very successful”.

All this suggests that the door towards a deal is not closed yet, but it seems that the latest escalation prompted market participants to push back their expectations on that front, and rightfully so. Ahead of the latest escalation, the US President has repeatedly signaled progress in the negotiations, giving the impression that the two nations are closer to finding common ground than ever. Therefore, even if he tries to calm the markets now, no one can guarantee that the worst is behind us. After all, the US is still considering to tax all the remaining Chinese imports.

We believe that more concrete “truce” signals are needed before investors decide to divert flows from safe havens back to riskier assets. With the information we have in hand now, we believe that equities, the yuan, and risk linked currencies are likely to stay pressured for a while more, while safe havens, like the yen, may continue to benefit. That said, with USD/CNH getting closer to the psychological 7.00 barrier, we would stay cautious with regards to further yuan weakness, as Chinese authorities may intervene and stop any slide lower, in order to prevent fears and speculation over heavy capital outflows. We repeat for the umpteenth time that one of our favorite proxies for gauging changes in the broader market sentiment, especially when related to the US-China sequel, is AUD/JPY.

AUD/JPY — Technical Outlook

From around mid-April, AUD/JPY has been trading lower, moving below its short-term downside resistance line taken from the high of April 18th. After another sharp sell-off, which occurred yesterday, the pair travelled south and managed to find good support near the 75.70 hurdle. This area also acted as an intraday swing low on April 4th. The rate then rebounded and is now trying to make its way higher. However, even if the pair pushes a bit further up, it may test the above-mentioned downside line. If that line remains intact, we might see another round of selling, hence why we will stay somewhat bearish for now.

If AUD/JPY moves towards the 76.34 barrier and breaks above it, the pair might push a bit higher and test the aforementioned downside resistance line. If that line remains intact, the bears could quickly pick up on that and take advantage of the higher rate. This might force the rate to slide, potentially bypassing the 76.34 obstacle and aiming again for the 75.70 zone, marked near yesterday’s low. If this time that zone is not able to withstand the bear-pressure, a break lower could bring the pair to the 75.25 barrier, marked by the intraday swing high of January 3rd and the low of January 4th.

Alternatively, a break of the previously discussed downside resistance line could make the bears worry about their capabilities of pushing the rate lower. But if AUD/JPY makes another strong move higher and breaks above the 77.10 mark, which is the high of May 10th, this could put the bulls in full control, as this might spook the bears from the field for a while. Such a move may open the door to the 77.40 obstacle, a break of which could send the pair further north. This is when we will target the 77.90 area, or the 78.10 zone, marked by the intraday swing high of May 7th and the low of April 25th respectively.

S&P 500 — Technical Outlook

The S&P 500 index continues to drift south, trading below its short-term downside resistance line drawn from the high of May 6th. But as we can see by the current activity on the cash index, the price has rebounded from the 2798.5 area and is now trying to recover some of its yesterday’s losses. The S&P 500 looks quite oversold already on the shorter timeframes and has distanced itself from the above-mentioned downside line. That said, the “risk-off” sentiment could continue pressuring the equity markets, which may result in another sell-off. For now, we will stay somewhat bearish, but before examining the downside again, we will wait for a break through the recent low first.

A drop below yesterday’s low, at 2798.5, could confirm a forthcoming lower low and send the index down to the lows of March 12th, 13th and 25th, at 2784.0. We may see the S&P 500 stalling around there, or even retracing slightly back up. But if the sellers remain in control, a break below the 2784.0 obstacle could push the price towards the 2775.5 zone, marked by the high of March 7th.

On the other hand, in order to consider a larger correction to the upside, we would need to see S&P 500 moving above the 2825.0 hurdle, which is Friday’s low. This way, the index might clear the path for itself towards the 2835.5 obstacle, a break of which may lead to a test of the 2851.0 level, which acted as Friday’s and Monday’s intraday swing lows. Slightly above that level runs the aforementioned downside line, which may also get tested, if the price continues to accelerate. That said, the line could provide good resistance and stall the index for a while, until the buyers and the sellers decide on the next directional move.

As for Today’s Events

Apart from any new headlines and developments surrounding the US-China trade sequel, we will also keep an eye to the economic calendar, as there are some noteworthy releases scheduled.

During the European morning, we get inflation data for April from Sweden. Expectations are for both the CPI and CPIF to have ticked up to +2.0% yoy and 1.9% yoy from +1.9% and +1.8% respectively. That said, as we noted several times in the past, we prefer to pay more attention to the core CPIF metric, which excludes energy. At their latest gathering, Riksbank policymakers kept their key repo rate unchanged at -0.25%, but they decided to push back the timing of when they expect interest rates to rise further. While they have previously noted that the next rate increase will be “during the second half of the year”, this time, Swedish policymakers said that “The repo rate is expected to be raised again towards the end of the year or at the beginning of next year”.

A potential slide in the core CPIF rate, which currently stands at +1.5%, may raise speculation that the Bank will dismiss the “end of the year” part, thereby joining the club of central banks that abandoned their hike-plans for 2019, like the ECB and the Fed. However, we prefer not to rush into conclusions based on this data set. The next Riksbank meeting is scheduled for July 2nd, and up until then we will have the May inflation data in hand in order to examine whether the world’s oldest central bank could alter its forward guidance again.

In the UK, the employment report for March is coming out. The unemployment rate is expected to have held steady at its 44-year low of 3.9%, while average weekly earnings, both including and excluding bonuses, are expected to have slowed somewhat, to +3.4% yoy and +3.3% yoy from +3.5% and 3.4% respectively. According to the IHS Markit/KPMG & REC Report on Jobs for the month, the latest increase in starting salaries was the slowest in almost two years, while temporary pay slowed to the lowest since March 2017, supporting the case for a slide in the earnings rates.

With regards to the energy market, we get the API (American Petroleum Institute) weekly report on crude oil inventories for the week ended on May 10th, but as it is always the case, no forecast is available. The OPEC monthly report is also scheduled to be released.

On Wednesday, during the Asian morning, Australia’s wage price index for Q1 is due to be released, just a day ahead of the nation’s employment report for April. No forecast is currently available, but bearing in mind that the Labor Costs sub-index of the NAB Business Survey rose 0.6% qoq in March, we see the case for the quarterly rate of the wage price index to be close to that number. Bearing in mind that the qoq rate for Q1 2018 — which will drop out of the yearly calculation — was at +0.5%, this may drive the yoy rate further up. In Q4 2018, the yoy rate of the index rose to 2.3% from 2.1%.

From China, we get industrial production, retail sales and fixed asset investment, all for April. The yoy rate of retail sales is expected to have ticked down to +8.6% from +8.7%, while industrial production us anticipated to see a more severe slowdown, to +6.5% yoy from +8.5%. Fixed asset investment is forecast to have accelerated somewhat, to +6.4% yoy from +6.3%. Following China’s better than expected GDP for Q1, this data set suggests that the economy may have entered Q2 on a softer footing. If this is the case, concerns with regards to the performance of the global economy may increase again, especially in the midst of all this uncertainty surrounding the US-China trade sequel.

As far as the speakers are concerned, we have two on the agenda: Kansas City Fed President Esther George and San Francisco Fed President Mary Daly.


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Originally published at on May 14, 2019.

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