The Trump administration is inflaming the trade war on Monday by designating China a ‘currency manipulator’.
Why? Because China has allowed its currency to weaken below 7.00 against the USD on Monday. It appears that trade negotiations between the two largest economies are breaking down. And more likely than not, we will see further retaliatory measures by both sides in the near future.
In recent articles, I have been highlighting the dramatic re-positioning into haven assets – ie, gold, Japanese Yen, and government bonds such as Treasuries. I was left wondering whether equities will crack soon. They have indeed.
On Monday, many European and US stock indices slumped as investors fear an escalation of the trade war. In the UK, the FTSE 100 Index wiped out months of gains in just a few days. The old market observation that prices go down faster than they go up remains brutally true. Some technical support exists at 7,000 for the Footsie – but whether this will hold firm is questionable (see Featured Chart).
In the US, the S&P 500, Dow and Nasdaq all registered sharp losses this week. The former, for example, lost momentum at the 3,000 psychological round number level to trade at 2,850 (see below). Yes, the index is holding on to the pattern of higher lows. But the sharpness of the decline indicates melting confidence. A period of choppy and volatile trading has begun.
Therefore, I expect investors will continue to hold haven assets – until for prices for risky assets have fallen to ‘bargain’ levels. In this period, a lot of technical support will be taken out as prices attempt to find new floors.
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