Worries over U.S economic sanctions on Huawei and spillover effect on trade negotiations. China has communicated to retaliate against Thursdays Trump moves forward with an executive order to ban Huawei equipment from U.S networks. Breakdown in US-China communication hurt Chinese indices. Shanghai Composite index dropped 2.7% while Nikkei 225 climbed 0.9%. In theory, markets should be numb to this type of aggressive Trump tactics. However, evidence of a global slowdown has increase raising the stakes on a stable US-China trade relationship. While the supportive bias of central banks is the only thing truly keeping equity markets afloat fears of dramatically slower growth is a real mounting. Add to the mix geopolitical uncertainty of Trump hawkish rhetoric toward Iran and sending warships to the Middle East based on flimsy intel, just stinks of 2003. As Stephen Colbert stated, “worst throwback Thursday ever.” Global nervousness has built clear trends on sending EM and growth-sensitive FX lower and driving up historical safe haven currencies. Yet G10 1-month atm vol remains subdued below the 55d MA. EURUSD remains confined to a yawn-inspiring 1.11-1.1250 range. We don’t see the current news follow as a single of a structural shift, but the risk are mounting and the upside in equity looks further constricted.
By Peter Rosenstreich