Financial markets remain on high alert as the U.S.-China trade war fears are providing the needed incentive for bears to take control. Friday’s sell-off in U.S. equities was ugly, after President Trump announced plans to impose tariffs on up to $60 billion of Chinese imports. The new proposal dragged the S&P 500 down by 2.1% and sent the Dow Jones Industrial Average into correction territory (a 10% fall from its 2018 peak). It was the worst week for the S&P 500 since January 2016 and the fourth worst performance since 2010.
Currently, it remains unclear whether we are headed into a massive trade war. I still believe that President Trump is using his “Art of the Deal” tactics to get better trade deals, while China is following Sun Tzu’s philosophy to “win the war with no battle”.
U.S. Treasury Secretary Steven Mnuchin commented over the weekend that he is cautiously optimistic that an agreement would be reached between the U.S. and China, and this would likely calm the markets when the U.S. trading session kicks off. However, the longer the “wait and see” mode lasts, the more pressure will be felt in the equities market. After all, many companies will need to adjust their expansion and capital spending plans according to the new developments. This will certainly impact investor’s confidence and risk global economic growth, which has been the key pillar of the nine-year-old bull run.
Last week’s risk-off mode did not provide any relief for the greenback. Instead of gaining on the equities sell-off, the U.S. dollar fell to its lowest level against a basket of currencies in five weeks. The biggest risk to the U.S. dollar is China reducing or just scaling back purchases of U.S. Treasury bonds. China holds $1.1168 trillion in U.S. debt as of January, or about 18.7% of all foreign holdings of U.S. bonds, and the U.S. cannot afford to lose the biggest purchaser, when it is currently expanding its budget deficit.
This week’s final reading on U.S. and U.K. Q4 economic growth isn’t likely to move markets. However, the U.S. consumer will be under the spotlight with consumer confidence, personal income and spending due for release. These sets of data, including the PCE report, are likely to cause slight volatility.