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Dead Cat Bounce in Europe As Trade War Fears Persist?

As it starts to dawn on the market that this is not just another Trump tactic and the US President is, in fact, serious about initiating a damaging global trade war with potentially catastrophic economic consequences, traders are jumping out of risky assets and fast. With deteriorating US – Sino relations quickly approaching a point of no return, Wall Street tumbled lower following the trend set earlier in the day in Europe.

 

Tech Stocks Hit

Tech stocks were the biggest decliners overnight, wiping out recent gains in the sector and sending the Nasdaq 2% lower, as investors reacted to Trumps plans to bar many Chinese companies from investing in US tech firms.  In a change of tactic, there is a chance that this latest move by Trump could pinpoint a new focus in this unfolding trade war, where we start to see both countries attack foreign investment, after moving on from trade tariffs.  The Dow dropped over 320 points on Monday, whilst S&P was also closed 1.3% lower.

Asia is seen taking its cue from the lower close in the US, plummeting in trading overnight. Any hopes of Trump backing down before the midterm elections seem pretty farfetched. If true, this feels like a medium-term bearish factor which has the potential to pull the markets effortlessly into correction territory.

Despite a lower US & Asian trading session, European markets are seen advancing on Tuesday. With no change to fundamentals, there is little hope that this anything more than a mere dead cat bounce.

 

US Consumer Confidence

The economic calendar is pretty quiet on both sides of the Atlantic, with the only high impacting release coming from US consumer confidence. Consumer confidence in the US hit an all-time high in April as Americans felt optimistic over the health of the jobs market and over their personal finances. Traders will be keen to see whether Americans still chose to shrug off headlines of trade wars and retaliation, opting to focus on more palpable domestic concerns such as unemployment and wage growth.

 

Has the dollar peaked?

The dollar has traded lower over the past four sessions as the risk off climate sends investors towards US bonds, dragging the yields lower and therefore taking some support away from the dollar. Add to this that traders are focusing increasingly on the damage that a trade war could do to the US economy and there is a strong possibility that the dollar may have already peaked. Any signs that the US consumer is starting to be affected by the looming trade war could drag the dollar lower.

 

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