(26 AUGUST 2019) DAILY MARKET BRIEF 1：Trade escalation scares … everyone.

 


Markets remain shaky at the start of the trading week. Asia equities were lower across the board, pricing in higher trade tensions triggered by recent events. Last week, both China and President Trump, in a sudden escalation, announced new tariffs. President Trump, via tweet (per usual), announced additional tariffs on Chinese including 5% tariffs on $550 billion of Chinese imports. In an unprecedented declaration, Trump suggested to American companies to explore relocation options. Indicating that utilizing the broad power of the International Emergency Economic Powers Act of 1977 could force American companies to changes business strategy. In our view a worrying expansion of US presidential power. China released details for retaliation tariffs on roughly $75bn worth of US exports, including soybeans, oil, automotive and a variety of agro-products. The reactions from China against the US decision to impose higher tariffs were expected, just not so soon. As expected, that Trump's trade tweet spooked the market, resulting in a flight to safety supported safe-haven assets: US treasuries yields fell, CHF and JPY gained while USD weaker against g10 peers. Gold rose to a new multi-year higher at $1555. The market raised the probability of the Fed cutting 50bp in September by about 8pp to about 60% probability.

Market and business's new sensitivity to trade war developments has opened another dimension for potential crises outside geopolitics. Central Bankers now need to hit a rapid and discretionally moving target. Highlighted in Fed Chairs' speech at the Feds annual symposium in Jackson Hole, Wyoming trade uncertainty is now shaping monetary policy. Since Trump is making it up “on the fly” unexpected changes creates challenges for policy setting. Only minutes after Trump tweet on China, Powell stated: “Trade policy uncertainty seems to be playing a role in the global slowdown and weak manufacturing and capital spending in the United States.” And continued noting, “we will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2% objective.” Fed Chair Powell provided a balanced speech but made is clear the largest single factor driving policy, is trade tensions (both current and future). While the data might not warrant a cut, uncertainty around trade pushed the FOMC forward. Overall according to Fed Chair Powell the risks to the outlook had increased since the July FOMC meeting, supporting rising expectation of more than 25bp cut in September.

By Peter Rosenstreich