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President Trump saying that he was not planning to meet with China’s President Xi Jinping before the March 1st trade truce deadline hit sentiment overnight. Asian markets tumbled the most in over a month as fears spread that the world’s two largest economies will not manage to hash together a trade deal before tariffs are due to rise. After 1st March, US tariffs on Chinese goods are set to increase to 25% from 10%.
Chinese markets are still closed for Chinese New Year, re-opening on Monday. However, traders in Hong Kong are returning to their desks and we are starting to see volumes ramp up. The reaction we are seeing is to the deteriorating economic outlook as well as increased concerns over the fragile US – China trade relationship.
Whilst the dollar has been supported by its safe have status, the Aussie dollar which is considered a liquid proxy for the health of the Chinese economy, tumbled again overnight. The aussie dived another 0.5% against the greenback putting it on track for losses of almost 2.4% across the week.
Up to now the markets have been optimistic about a trade deal being reached, despite little solid evidence. Trump’s stance is now rattling investor nerves just weeks before the deadline. With US corporate earnings starting to dry up, traders' full focus will soon be back on trade developments. With no deal in sight this will have a negative bias on equity market flows.
Oil extends losses
After shedding 1.6% in the previous session, oil was extending losses on Friday. Fears over slowing global growth hitting demand overshadowed reports of OPEC cuts and Venezuelan sanctions. WTI dropped close to 2.5% on Thursday and was down a further 0.7% in early trade on Friday. The overriding fear is that the increasingly evident slowdown in global growth will hit demand for oil, making OPEC cuts futile. If demand drops, OPEC will need to cut harder to sustain prices at these levels. We just don’t know if they are prepared to do so. Softer oil prices are likely to keep energy stocks out of favour as European markets open.
Pound edges lower as Theresa May returns empty handed
The pound was moving lower versus the dollar but higher versus the crushed euro after Theresa May returned from Brussels empty handed. The EU unsurprisingly rebuffed the idea of adjusting the Irish backstop arrangement. Theresa May and her cabinet will now visit European leaders to convince them to change their stance. As the clock ticks we will need to question the ability of pound traders to hold their nerve. Right now we are seeing support at $1.2950, whether this holds as the game of chicken nears an end is doubtful.
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