Trade Wars or a War of Words

Trade Wars or a  War of Words

Incredibly S&P futures were down over 2.0% down at the NY open only to rumble higher to close 1.1 %  up on the day after investors dissected a sundry of Chinese and US trade statements and are now holding out for modus vivendi hoping that brewing trade wars turn into little more than a war of words.

Emboldened investor went on a bargain-hunting spree encouraged that neither country has established a tariff implementation itinerary, so hope remains alive with both parties still at the bargaining table.

Let’s face it,President Trump continues to walk back the most bombastic elements of his rhetoric, he has softened NAFTA stance, it happened with Amazon, and it could very well occur with China trade negotiations.

But volatility remains exceptionally elevated in stocks. However essential near-term support levels were tested and held.  Provided the market stays clear of 2532, the February low on the S&P, equity markets remain out of the danger zone. The markets base case scenario is for no escalation of trade wars, but with investors running on emotion rather than logic, we’re only a headline or two away from the next meltdown.

And while the tariff narrative is a real attention grabber, it’s turning into a wild goose chase for currency traders The fast reverting price action, especially on USDJPY, is oh so reminiscent of the Korean peninsula risk off swings,  which ended up being little more than a red herring as opposed to anything else.

Oil Markets 

Oil prices were boosted by another more significant than expected inventories draw. But fresh in traders minds is yesterday’s Bloomberg survey which indicated that the unstoppable drop in Venezuelan production is thought to have tanked  OPEC overall production to a 12-month low.

While analysts prediction has been notoriously off, in a market consumed by headlines these days a few prices negative numbers flashing across the screen have a surprisingly strong impact on sentiment especially with positions so heavily skewed long.

But the uptick in equity market can’t be ignored as the fear of a full-out trade wars decreases once again and gives rise to positive global growth narrative.
Gold Markets 

After peaking near $ 1348, gold prices tumbled lower as Wall Street’s three major indexes staged a remarkable reversal to close around 1 percent higher on Wednesday as investors turned less jittery after top economic adviser Larry Kudlow said the administration was involved in a “negotiation” with China rather than a trade war. Investors took this to mean President Trump’s bark is worse than his bite when it comes to an escalation of trade wars.

Gold is holding above significant support in 1330 area as we make the turn for the key wages component of NFP. While Gold prices will remain hypersensitive to headline risk, the proximity of NFP suggest the market will hold current ranges

Currency Markets

Probably the  biggest take away from all the Trade War noise is the lack of impact on currency markets other than the apparent new go to haven, the New Zealand Dollar

The Japanese Yen

USDJPY remains remarkably buoyant despite recent “risk of flux ” and talk of BOJ discussing an exit from QE. Everyone owns a few Yen, so it seems, and with “risk sentiment” bordering on overly bearish, Traders were looking to take some short dollars off the book heading into Friday’s  NFP. But there remains more reason to like the Yen that not as BoJ in the early stages of policy debate and risk aversion isn’t leaving anytime soon. But with central bank reserve managers increasing Yen holdings, perhaps there is nothing really to fear on this crowded trade.

Making the turn towards  Friday’s  NFP it’s not inconceivable the USDJPY will trade like a beach ball underwater as the buoyant forces of physics take over.

The New Zealand Dollar

The Kiwi remains relatively insulated from all the trade war kerfuffle and immune from the slide in industrial commodities which are causing concerns on the Australian dollar front. G-10 dealers favourite play is long NZDJPY which seems to be working quite well as the risk sentiment has gotten far too bearish on trade war again.

The Malaysian Ringgit

The tariff narrative continues to frame regional risk sentiment. And with trade war concerns easing once again, this should benefit the local. Also with OIL prices firming overnight, we should see the USDMYR gravitate towards the lower end of this week very tight trading band. However, two-way flow and positions adjustments will hold the Ringgit in a close range as the market veers towards Friday’s key US NFP

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes