Morning Commentary: What Goes Up Must Come Down

Foreign Exchange - Morning Commentary
What Goes Up Must Come Down
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
At the end of last week, the markets were caught off guard by trade tensions escalating once again.  Using history as a guide, one would expect a market sell-off followed by some positive development to help calm the markets.  

True to form, risk assets sold off sharply after last Friday’s escalation.  However, risk sentiment has recovered after President Trump said that China asked to restart talks, the last part of this well-worn narrative.  Notably, Geng Shuang, a spokesman for the Foreign Ministry in Beijing, said that he wasn’t aware of any weekend US-China phone call. 

Ultimately, whether or not recent talks between the US and China were held is almost a secondary issue.   While markets have responded positively to this latest development and de-escalation is certainly better than continued escalation, the fact still remains that uncertainty is high.  Stock markets in Europe are on track to finish broadly higher, and US equities could very well follow suit.  However, that is just a short-term measure and we have all seen trade talks turn on a dime.  Longer term, the most recent positive developments are unlikely to prompt business to make new investments as further escalation or de-escalation could come at any moment.  

This is where the concern with the trade war lies.  Global growth is slowing, and the trade war is one of the key reasons as illustrated by central bank comments out of Jackson Hole last week.  Market pricing already has Fed Funds going down to 1% as well as other G10 central banks taking their rates further negative.  This implies limited scope for monetary policy to save the global economy from political risks, especially with fiscal help unlikely.  Moreover, with trade war damage akin to termite damage, striking a trade deal is not necessarily an “all clear” signal for the global economy.
  • The G7 meeting wraps up today with the US and Japan agreeing to a new deal in principle and the US and France drafting an agreement on internet taxes. 
  • In Germany, the IFO business climate index fell to 94.3 in August, the weakest reading in almost 7 years. 
  • US durable goods orders came in better than expected, rising by 2.1% versus expectations for a 1.2% increase. 
  • Overnight, the offshore yuan (CNH) weakened to its weakest levels since it was created in 2010 but has since retraced some of those losses on positive trade comments
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