Fade the Trade War Hype
Markets are on a knife-edge. US President Trumps imposing new trade sanctions against China has meaningfully increased the probability of a trade war. China is unlikely to site idly buy this time around. While at the EU summit, which is expected to discuss the US steel and aluminum tariffs. Asia markets were lower across the board while safe haven CHF and JPY were the only real gainers in FX. Yet, picking trend in FX remains complicated and markets tries to pick winners and losers from an extended protectionism. Countries with significant export exposure to the US such as MXN have declined yet, counties with solid domestic and lower reliance on exports such as India remains supportive.
Surprisingly in this corned generally beta sensitive ZAR has also improved (marginally helped by gold trade). There still expectations for a favorable outcome with limited escalations based on negotiations and in our view Trump his using issue for political gain rather than actual trade repositioning. This action gives Trump a nice bullet point for stump speeches on the 2020 campaign trail. But he gains little from sparking a full-blown trade war. In addition, countries still taking grievances to WTO indicated trade remain within a management framework. Despite the intensifying hype we see this as an opportunity to reload in EM long positions. ZAR, INR, PLN and MXN all look interesting for varied reasons.
Asian markets slump, as US trade sanctions against China intensify
Relationship between the two largest economies does not bode well. The Trump administration memorandum released on Thursday to impose 25% tariffs on Chinese imports worth USD 60 billion is worrying investors.
The first signs are already in place: Hong Kong Hang Seng sells off -2.95%, hampered by IT (-6%) while China CSI300 dropped by -2.87%. On Japan side, Nikkei 225 dropped by -4.51%, followed by Topix (-3.62%).
Chinese retaliation measures did not take long to come as Chinese trade ministry communicated its willingness to impose tariffs on US imports on pork, fruits, nuts, wine and other construction-related products. Additionally, China is planning to initiate infringement procedures to the World Trade Organization concerning recent introduced iron and aluminum tariffs. The outcome won’t probably get anywhere, everything is about baring the teeth and putting economic matter aside. It is only a matter of time until the situation will be cooling down.
In spite of current political tensions between both nations, we see the USD/CNY strengthening in the short-term, currently trading at 6.32 and expected to head along the 6.33 range.
