Tariff threat turns risk appetite on its head

Trump tweets tariff threat

Markets closed on Friday in a buoyant mood following a very strong US jobs report for April. The mood was completely reversed at Monday’s open after US President Trump at the weekend threatened to ramp up tariffs on up to $525 billion worth of Chinese goods by Friday, due to the seemingly lack of progress in the US-China trade talks.

The shock announcement, reversing previous decisions to pause in the tariff wars, sent equity markets into freefall. The US30 index fell about 1.9%, the NAS100 index 2.2% though Chinese shares bore the brunt of risk aversion as they opened after a three-day holiday, with the China A50 index slumping as much as 5%, the biggest one-day decline in 15 months. The index is testing the 55-day moving average at 13,097, which has supported prices on a closing basis since January 15. The next possible support point could be the 38.2% Fibonacci retracement of the 2019 rally at 12,678.

China50 Index Daily Chart

Source: OANDA fxTrade

As yet there has been no official response to the threat, though the WSJ has commented that there is a heightened risk that China might cancel the trade negotiations which are due to resume in Washington this week. Such an outcome would severely dent risk appetite further.

AUD/USD slumps to 4-month low

Risk aversion was evident across currency markets as well, with risk-beta Australian dollar falling as much as 0.8% versus the US dollar to strike the lowest level since the mini flash crash on January 3. The yen was sought after as a safe haven as USD/JPY fell 0.71% to 110.48, the lowest since March 28.

AUD/USD Daily Chart

Source: OANDA fxTrade

China tweaks reserve ratio requirement

China’s PBOC cut the reserve ratio requirement for small and medium-sized banks, mostly those with assets lower that 10 billion yuan ($1.5 billion), by 350 basis points to 8% effective May 15. The funds released are stipulated to be used for lending to small and private firms. The yuan was embroiled in the tariff reaction, so was unable to gain anything from the announcement. USD/CNH gained as much as 1.3% to 6.8210 and could test the 200-day moving average at 8.8245 for the first time since February 19.

USD/CNH Daily Chart

Source: OANDA fxTrade

Data forgotten with all eyes on trade talks

Hidden in the melee of risk aversion this morning, China’s Caixin services PMI rose to 54.5 in April, up from 54.4 in March, with the new export orders index climbing the most on record.

Already confined to a distant memory was Friday’s stellar April US jobs report. After such data, risk appetite would normally be soaring and we would be witnessing a follow-on of Friday’s moves. Not today.

Busy Weekend: Trump Tariff Threat, Buffett, and North Korea

The week starts off slowly on the data front, with final April Markit services PMIs for Germany and the Euro-zone seen unchanged from the flash reading while Euro-zone Sentix investor confidence is expected to slip back to -2.1 in May from -0.3 in April. The region’s retail sales are also expected to slow, falling to +2.3% in March from +2.8% in February. There are no US releases, only a speech from Fed’s Harper.

The full MarketPulse data calendar can be viewed at https://www.marketpulse.com/economic-events/

Content 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 Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.