The trade war is finally upon us

Traders returned from the 4th of July holiday with few if any convictions ahead of President Trump’s first tariffs that are scheduled to hit $34 billion of Chinese imports later today and Beijing plans to respond with levies on an equal amount of goods swiftly.

The Trump administrations trade war is finally upon us, and by all accounts, we’re headed for an unparalleled trade conflict between the world’s largest economies. If this moves off the tit for tat battleground into a full out trade war, it will not only threaten market stability but could compromise relations between Washington and Beijing at a time when co-operation dealing with North Korea should take some precedence.

With so much uncertainty hanging in the balance, trading was very quiet overnight but if anything flows devolved into a bit of a chop feast as dealers were doing little more than executing orders as no one is looking to stick their neck out on this call.

But let’s not sidestep the US jobs report or the expected deluge of Brexit headlines as PM Theresa May hopes to find a resolution on the customs issue that is dividing her cabinet.

US Market

US market closed on a solid note after yet another technology sector rally triggered by the FOMC minutes which could be interpreted as erring on the dovish side after the committee highlighted concerns over trade tension. However, there remains  broad support for ” gradual ” rate hikes among the committee members suggesting they view the US economy on solid ground.
Also, there was a bit of a relief rally after the U.S., and its European counterparts could move to ease tensions over automobiles. Which of course does keeps hopes alive for a last-minute China tariff reprieve, however slim that may be. Trump is not budging, so it will be up to China to blink first.

The devastating equity markets implication as the tariff effects seep through global supply chains cannot be understated suggesting now is not the time to bottom feed especially in local ASEAN markets.

Oil Market

An unexpected1.2 million barrels build in US commercial crude oil inventories for the week ended June 29 as US exports fell 664,000 barrels per day from the record level of the prior week and imports jumped unexpectedly by 699,000 bpd.

The narrowing of the WTI -Brent spread can likely explain the decline in export.s And while there remains an abundance of uncertainty over supplies from Libya, Venezuela, and Iran which should continue to support the market on dips, while inventories at Cushing continued to decline due to the Syncrude outage, the surprise inventory increase has most definitely triggered some profit taking ahead of tonight’s tariff announcement.

Profit taking was always on the cards, bearish inventory print or not as there so much noise and confusion going on as Saudi Arabia, Russia and even President Trump are trying to superintend oil markets.

Gold Market

The US dollar has remained at the weaker end of the weekly range after finding little support from the FOMC minutes which had dovish lean. As such gold continues to trade with a more favourable bias and indeed investors are gingerly hedging for a possible global equity tumult if trade tension escalates from the tit for tat battlefield into full out war.

Asia  Market
I can’t help but look towards next week China tier one economic data dump which will provide some exacting signpost for evaluating the mainland economy. Although the near-term focus in on Trade, next week will be a massive test for local markets

But for today, in general, local markets continue to trade with a predictable heavy tone ahead of the first round of US tariffs.

MYR: Looks like the Malaysian bond markets finally woke up for their slumber after a well subscribed 30Y MGS . And on the currency front, the bid to cover ratio on this long-dated issue is very encouraging as this extended tenor is usually the domain of real money investors. Perhaps a bit of confidence returning to the local markets which could trigger some much needed offshore flow to return next week. But of course, the task at hand is to navigate the first US tariff salvo.

Currency market

USD: lack of any significant movement overnight suggests a lack of any new conviction ahead of the tariff announcements.

EUR: Remains supported around 1.1700 as the markets continue to take note of ECB sources suggesting market under-pricing ECB policy

JPY: Half the market wants to be short dollars while the other half wants to be long US dollar vs JPY.

GBP: Get ready for the headline rollercoaster.