China’s Retaliation Sink Stocks and Oil; Safe-havens Reign Supreme

China’s retaliatory strategy to the US appears to be death by a thousand cuts. China has methodically delivered a wave of negative news that are hitting President Trump, where it hurts, the US stock market. China has steadily weakened the yuan this summer and last night’s break of the important level of 7 yuan to the dollar shows Trump’s new Chinese tariffs are weighing on Beijing. China is now considering putting tariffs on US agricultural products and we will likely see threats on shipments of rare earths which is critical for US manufacturing across a wide variety of sectors.

The US stock market reaction is pretty severe as the case for fresh record highs has been dented by the growing belief that we are nowhere near seeing enough pain on either side of this trade war to warrant someone making a clear concession. It seems we could see this tit-for-tat move continue for a couple weeks. Not even the promise of deeper rate cut expectations will thwart this selloff.

Once we see someone blink in this latest stage of the trade war, the bull-market thesis will fully be back in place and we should not be surprised to a return back to the record highs with US stocks. The remainder of August could get messy, but we should not be surprised if we see institutional interest return strongly if we see 5% more in weakness.

Currencies are seeing the safe-havens (franc and yen) thrive, as expectations grow for China to continue depreciating the yuan.  The euro is higher today mainly on the weaker yuan, as they are heavily exposed to China.

Oil

Trade tensions and a slowing pace with drawdowns on US stockpiles are taking oil prices sharply lower. Crude prices are getting punished by the US-China trade war and we should see demand forecasts see sharper downward revisions. Crude oil inventories string of weekly drawdowns could see a surprise a build this week and that could tentatively break oil’s back. WTI remains vulnerable to the downside and could see support around the $52.50 a barrel level.

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