Markets Swan Dive as China Tensions Rise

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Stocks wobble on China tensions
Trump seeks to decouple
Nikkei 0.80% Dax -0.52%
UST 10Y 0.71
Oil $38
Gold $1928/oz
BTCUSD $10231

Asia and the EU
EUR Current Account -6.2B vs. -11.1B

North America Open
No data

Equity markets were in a swan dive at the start of European trade as tensions between China and the West escalated materially.

Trump raised the prospect of “decoupling” from China in a Labor Day press conference at the White House lawn yesterday.

“If we didn’t do business with [China], we wouldn’t lose billions of dollars,” he said on Monday. “It’s called decoupling. So you’ll start thinking about it. You’ll start thinking they take our money and they spend it on building airplanes and building ships and building rockets and missiles.”

He also added, “We will make America into the manufacturing superpower of the world and will end our reliance on China once and for all,” he said. “Whether it’s decoupling, or putting in massive tariffs like I’ve been doing already, we will end our reliance on China, because we can’t rely on China.”

The news clearly rattled the markets which fear an escalation of tensions between the two economic superpowers as the US nears its election. The increasing conflict could hurt the US high tech sector the most with China already stating that it will try to create its own chip design and manufacturing business as it tries to rely less on the US technological know-how

With tech companies responsible for nearly all of the rally in the US equity indices, the new flare-up in Sino-US relations could turn the recent correction in Nasdaq into an avalanche of selling as investors panic and begin to dump the very high valued stocks.

With no major news on the docket today, it will be up to the US corps to stabilize the move if the selling accelerates but for now there is little reason to think that sentiment will improve as the day proceeds.

In FX meanwhile, the central story of the day was the weakness in the pound which was lower for the second day in a row after PM Johnson threatened to walk away from the Brexit negotiations by October 15th if the EU did not budge on its demands. For now, the market continues to believe that Mr. Johnson is bluffing but if the two sides cannot find a suitable compromise the chance of the UK being spun out of the EU without any trade whatsoever could rise markedly. It serves neither side well to walk away empty-handed but the UK as the smaller isolated economy with few products that anyone wants to buy would be the much more vulnerable party in a no-deal Brexit and cable is nowhere near close to reflecting that scenario at current prices.

Boris Schlossberg
Managing Director

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