Is US Starting a Cold Trade War?

Posted on

May 3
Risk-off across the board
Manufacturing data on tap
Nikkei closed Dax -3.67%
UST 10Y 0.59%
Oil $21/bbl
Gold $1704/oz
BTCUSD $8653

Asia and the EU
EUR Sentix -41.8 vs. -25.9

North America Open
No Data

It has been a quiet but decidedly risk-off start to the week’s trade with some of the bourses in Asia closed for spring holidays. Stock index futures gapped lower on the open and remained negative throughout Asian and early European trade and the dollar was bid across the board on the same sentiment.

In Europe, the equities were particularly hard hit with the DAX down nearly 4% as investors soured on any idea of a strong recovery. Although the pandemic appears to have crested in all the major EU economies and most of the members were making efforts to slowly lift the lockdowns, the markets are coming to the realization that the return to normal activity may take years not months.

Europe is particularly hard hit because the current climate is highly negative for tourism in its Southern states and trade in its Northern ones thus hurting the Eurozone economy from all angles. Today’s Sentix numbers which printed much more than forecast at -41.8 vs. -25.9 are emblematic of the troubles ahead for the region.

In North America, investors could also turn to profit-taking as the week begins given a series of negative news over the weekend. First, on the COVID front, the data suggests that the US may have flattened the curve but so far has not been able to bend it. Cases in NY state – the worst-hit region – have fallen markedly, but cases ex-NY are rising to create a steady-state of about 30,000 new cases and between 1500-2000 deaths daily. The US is on a path to reach 100,000 fatalities from COVID-19 by June. Furthermore, with many states re-opening their economies the risk of a new spike in infections is highly probable especially as people abandon any pretense of social distancing.

But perhaps the biggest negative factor weighing on the market is the renewed US-China hostilities that are reaching a fever pitch with the Trump Administration hurling a series of accusations that COVID-19 may have been released into the populace as a result of sloppy procedures at the Wuhan bio-weapons research facility. The US is not the only nation questioning China’s actions as both Australia and the UK have been pressing the Chinese for more transparency.

For markets – the true threat is that the diplomatic war of words – could quickly spiral into a defacto Cold War on trade. President Trump is already hinting that if the Phase One deal does not show results he will impose a new series of tariffs on Chinese goods and escalate the conflict further. It’s this political risk with its myriad economic implication amidst the devastation of the pandemic that the market may be completely underestimating.

For now, the selloff appears to have stabilized but little economic data on the docket til the end of the week, the focus on Wall Street will be on Washington DC and President Trump’s Twitter account.

Boris Schlossberg
Managing Director

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