US-China trade war heats up

Tensions escalated another notch over the weekend as the Trump administration undertook new retaliatory measures against China. After aiming at aluminium and steel products, then extending the tariffs to a broad range of Chinese products, the White House announced a new set of measures aiming at protecting ‘industrial significant technology’. The rules would prevent any company with at least 25% Chinese ownership to invest in US technology firms. Yet the final conditions are not written in stone, as the 25% threshold could be much lower. In addition, the National Security Council and the Commerce Department is also crafting a plan to prevent shipment of key technologies to the world’s second largest economy.

As expected, equity markets reacted negatively to the news with the Nikkei erasing 0.79% and the CSI 300 falling 1.34%. In Europe, the Eurostoxx 600 dropped 0.67%, while the SMI fell 0.78%.

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In the FX market, investors took shelter into safe haven currencies with the Japanese yen benefiting the most. USD/JPY fell 0.40% to 109.53, while the Swiss franc’s gains were more modest (+0.10%). Overall, the greenback is benefitting the most following renewed tensions between the two largest economies. It is worth noting that the PBoC lowered the reserve requirement ratio to 15.50% from 16% on Sunday, in reaction to slowing growth and, obviously, potential negative effects from the trade dispute. The pressure on Chinese securities should accelerate further as investors continue to dump equities in anticipation of escalating tensions between the US and China.

Erdogan to govern Turkey for a second term

Turkish elections of Sunday closed as widely expected with a majority of 53% for President Tayyip Erdogan AK party, out of a 99% counting. Erdogan’s main opponent, Muharram Ince from Republican People’s Party gained 31% of the votes, remaining the second largest political party of the country.

Counting in total five political parties in the parliament (threshold of 10% electoral votes reached), the possible collusion among parliamentary members seems reasonable at first sight, but the situation is rather divergent. Indeed, since the constitutional reform in April 2017, which reinforces the power of the leading president (Prime Minister seat abolition, immediate appointment right for top officials positions, right of intervention on legal system and state of emergency enforcement power) and further support of its allies from Nationalist Movement Party in the parliament, Erdogan’s ‘People’s Alliance’ is projected to win 342 seats out of 600 in the parliament, thus giving a rather weak power to existing opposition.

Following the news, the lira, which depreciated by -21% against the dollar since the beginning of the year is currently strengthening. USD/TRY is valued at 4.5942, trading lower since 4.7456 high (22/06/22018 high) and approaching the 4.5839 range in the short-term. Our scenario remains however a stronger USD/TRY due to current events in the mid-term. We think that recent lira rally is unsustainable, as the situation should lead the leading party to take unilateral actions (politically and economically), without consulting diverging opinions from opposition and which could have negative consequences on both the domestic economy and its relationship with commercial partners.

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