Financial market research and analysis

Concerns over an all-out trade war with China escalated on Wednesday, resulting in another day of losses on Wall Street. Investors are growing increasingly nervous as Trump rebuilds a White House team which is more in line with his interventionist approach to foreign policy and as reports surfaced that Trump is looking to put $60 billion of tariffs in imported goods from China, no longer just steel and aluminium. This is expected to be the last straw for China, with retaliation to this latest move almost a given.

Both the Dow and the S&P notched up a third straight day of losses, closing down 1% and 0.6% respectively, notably with the S&P dipping below its 50-day moving average. On the Dow, Boeing, considered the most vulnerable target in a trade war sunk 2.3%, putting its losses over the past 3 sessions at 7%, other industrials and banks also led the declines. Meanwhile the Nasdaq ended the day 0.2% lower, its second straight day of losses.

Heightened fears over trade wars and the direction of foreign policy in the White House weighed on sentiment overnight in Wall Street and in Asia. All major indices in the Asia Pacific region are pointing lower, however European futures are showing some resilience.

Dollar gains ground

Risk off once again dominated with US investors selling out of equities in favour of less risky bonds, pushing bond yields steadily lower. The dollar actually showed considerable resilience, trading marginally higher despite falling yields. Weaker than forecast retail sales weighed on the greenback, as fears eased over more aggressive hiking from the Fed. However, market participants didn’t dwell on the matter and instead focused on strong wholesale inflation numbers which put some life back into the buck.

Russia concerns expected to pick up

With no high impacting eurozone or UK data due for release investors could be tempted to focus rising geopolitical tension between Russia and the U.K. The pound was under pressure in the previous session as relations between the two nations deteriorated to a level not seen since the cold war. A period of tit-for tat punitive measures is now expected in retaliation for the Skripal poisoning and Theresa May’s expulsion of 23 diplomats. Any escalation in tension between the UK and Russia, particularly given the lack of UK economic data could result in the pound coming under further pressure today.

GBP to $1.38?

Despite pressure on the pound, GBP/USD showed resilience in the previous session, flirting with $1.40 before closing the session almost flat at $1.3969. A continued deterioration in UK Russian tensions today, plus better than expected US initial jobless claims and US Philadelphia Fed Business Outlook releases could see GBP/USD head southwards towards $1.3960, before extending losses to $1.3915 and on to $1.3880. On the upside, watch for a move above $1.40 to indicate a move higher to $1.4040.

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