On the Brink of a Full Blown Trade War

Market Trends - 20/06/2018

The safe havens received a boost this week as a trade war looms between the two largest economies of the world.

On Monday, the United States threatened to hit China with further tariffs worth $200 billion on Chinese imports. The first round of tariffs were announced on June 15 and were worth $50 billion. China promised to retaliate against this act by the U.S, triggering U.S. President Trump to look to slapping on more tariffs. The Chinese government called this blackmail and pledged to fight back forcefully against the potential second round of tariffs.

If a trade war escalates between the two economic powerhouses, it will destabilize the global economy. The basic threat of a fully-fledged trade war between the U.S. and China has dampened risk appetite in the markets. In the FX space, the main beneficiary of risk aversion has been the Japanese yen, while risk assets that are especially tied to China, such  as the nation’s major trading partner Australia, has seen a negative impact. The aussie has been underperforming in recent days due to this trade war risk. The Swedish Krona has also suffered.

In commodities, copper futures slipped, falling more than 1% on Tuesday amid fears of a trade war. Trade war concerns weighed heavily on emerging market currencies. The South African rand was particularly hit hard, as was the Mexican peso and Russian ruble. The main reason is because the emerging market economies rely on commodities markets, importing or exporting raw materials.

As markets take a breather for now and calmed down in early Wednesday trading, the U.S.  Administration is betting that Beijing will blink first.

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