Risk Aversion Returns as China Announces Tariffs

Dow Futures Slip More Than 500 Points Ahead of the Open

We’re back in risk aversion mode on Wednesday, after Beijing announced new tariffs in retaliation to those planned by the White House in a direct attack on Chinese exports.

With still a few hours to go until the open on Wall Street, Dow futures are posting losses of more than 500 points which makes for a rather bleak start to trading. The losses more than wipe out Tuesday’s rebound and set us on course for another worrying session driven by fears that a trade war between the world’s two largest economies is heating up with neither side showing any sign of backing down.

Dow (US30) Daily Chart

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The Dow has found support around 23,350 the last two times we’ve traded at these levels so this could be critical again today, with a break below here potentially signalling more severe losses ahead. This would require a drop of 3% or more today so may not happen straight away but the way markets are trading prior to the open, it’s not looking good.

DAX Slide Continues as China Fires Back at Trump

Trade Wars May Not Be as Easy to Win as Trump Promised

The Chinese tariffs will target $50 billion of US products including soy beans, cars and whisky, a sign that Beijing is up to the fight and that if US President Donald Trump wants to prove that trade wars are in fact easy to win, he’ll have to back it up with actions. Ultimately, the response we’re seeing in the markets suggest investors are not on board with the actions being taken by both countries and see them as a real threat to what has been a good period of global growth.

US 10-Year Treasury Yield Daily Chart

Source – Thomson Reuters Eikon

US 10-year Treasury yields are edging lower again, with investors potentially looking to longer term bonds as a safe haven play in these markets. Naturally, this will likely trigger more concerns about what a flattening of the yield curve means and whether it’s a reflection of increasing recession worries. I don’t think this is the case currently, with low inflation and safe haven demand, among other things suppressing longer term yields.

U.S at War: China Retaliates to Trumps Tariffs

US Employment, Services Surveys and Fed Speakers Still to Come

There is plenty of economic data being released throughout the day on Wednesday, although naturally this is being overshadowed by the latest tariff announcement. While not the most accurate indicator of job growth – as measured by Friday’s NFP – the ADP non-farm employment number is always looked to for an indication of how employers hired last month, with it being released two days before the official reading. Although, as has become the case, the earnings numbers are perceived to be of more importance now that job growth, with unemployment having fallen close to 4% and inflation lacking.

Also to come today we’ll get services and non-manufacturing surveys, factory orders and crude oil inventories. We’ll also hear from Loretta Mester – an FOMC voter this year and typically a hawk – and James Bullard – an FOMC voter next year and typically one of the more dovish members of the committee.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

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Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.