Financial markets finally pulled their heads out of the sand overnight as the US-China trade war escalated when China responded by imposing USD60 billion in tariffs of their own on imported US goods. A healthy dose of reality bites saw the equity markets and oil crumple, US bond yields fall and gold finally rally, all of which should have happened at least a week ago.

The greenback was, of course, mostly resplendent, rising 1% against both the offshore and onshore Chinese yuan, leaving both around 6.9000 to the dollar and within shouting distance of 7.0000 – a level that will almost certainly have President Trump’s Twitter account working overtime.

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A look around Asia, however, revealed several less mainstream currencies have actually surprised with their strength. The Thai baht, Vietnamese dong, Bangladeshi taka, Indian rupee and yes, the Japanese yen, all either held their own or rallied against the mighty greenback. Readers will know the BRICS of course; I am calling these countries the WOWS – the Workshop Of the World Substitutes. (If readers can construct something wittier, I would love to hear it!)

If the US-China trade war digs in for a very long campaign, many of those products we’ve never heard of from the workshop of the world will have to come from somewhere, and cheaper. It’s highly unlikely that USD500 billion of widget manufacturing will magically transpose itself to the rust belt of America in an employment Nirvana, I’m afraid. Perhaps the strength of these lesser-traded currencies reflects that theme – they’re simply best poised to benefit from a shift in trade-war production.


Wall Street had a terrible night with the S&P 500 falling 2,40%, the Nasdaq choking on an Apple and falling 3.40% and the Dow Jones down 2.40%. It was really a continuation of the rot that had set in throughout Asia and Europe earlier in the day, but it likely means that regional stock markets will be a sea of red this morning.

Given that equity markets are so far behind the curve in repricing the risk to the new-world reality, equities could be in for an extended period of pain. Those with high beta to China such as Taiwan, Hong Kong, Indonesia and Australia may find it reaches migraine levels.


The US dollar remained firm overnight supported by safe-haven inflows into the bond market where US yields continued to fall. One of the first things my grizzled Chief Dealer told me 30 years ago as a spotty junior was always to buy dollars in a war. He didn’t specify what sort of war, but the advice remains sound, especially so as US interest rates make it an effective high-yielder in a zero interest rate world.

The British pound (GBP) notably fell through the critical 1.3000 level to 1.2950 as the Conservative and Labour Brexit talks look close to collapse. At least UK politics remain consistent.

Regional currencies will remain under pressure to varying degrees today with the Australian dollar (AUD) a noted underperformer, falling 0.80% to 0.6950. With NAB Business Confidence this morning, a Federal election on Saturday and its role as a China proxy, the sharks are well and truly circling the not-so-lucky country dollar.


That other bastion of irrational exuberance, oil finally felt the chill winds of potential trade war fallouts on consumption overnight. Attacks on two oil tankers in the Middle East was not enough to save the black gold as Brent crude fell 1.30% to USD70.25 a barrel, and WTI dropped 1.40% to USD60.90 a barrel.

Iranian tensions and a possible escalation of hostilities in the Middle East may slow oil’s pullback, but trade tensions should mean that oil finds plenty of willing sellers on any intra-day rallies in Asia.


Gold rallied USD14 or 1.1% to recapture the USD1,300.00 an ounce level overnight, propelled by belated but heavy safe-haven buying. The yellow metal enjoyed a sprightly start in Asia, rising to USD1,302.00 in early trading with USD1,310.00 the next major technical resistance area.

Trade war fallout can finally put a floor under gold for now, and it may well continue to make upside progress as investors seek shelter from the storms. It’s important to realise, however, that gold’s rally is not a gold story, but a safe harbour story. That is a crucial difference; with any sudden breakthroughs in the trade standout possibly seeing investors stampeding for the exit as fast as they arrived.

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