Volatility from Ongoing Trade War and a Flight to Safety
Published on: 07/13/18 8:11 AM
Strong USD, Weak Oil, and Trade War Worries
The ongoing trade war between the United States and China has brought volatility back into the equity markets around the world. President Donald Trump has maintained his tough stance regarding china by threatening to place duties worth over $200 billion on a broad list of imports from China. The consequences would be felt by the American consumer because this would slap tariffs on half the imported goods from China and the consumer will pay for the tariffs in the form of higher prices when purchasing these goods. These potentially higher consumer prices could stall economic growth.
US stocks ended in the red for the day. With the trade war tensions mounting, the greenback has strengthened significantly. Being the world’s reserve currency gives it a safe-haven standing. Investors tend to flock into safe-haven assets, particularly the dollar, in times of market turmoil and uncertainty, The Asian and Europe indexes fell just like US equities. The US dollar has been increasing since the ECB rate decision back in June and the trade war tensions with china could potentially continue the trend if investors keep fleeing to safe assets.
The Swiss Franc, which is historically another safe-haven currency, rose in value. The Bank of Canada gave support to the Canadian dollar after raising interest rates and suggested there would be further rate hikes to come. However, the strength of the dollar outweighed the news of interest rate hikes and the greenback appreciated against the loonie. Both the Aussie dollar and the kiwi depreciated.
The largest drop in crude oil inventories was not enough to prevent the nose-dive that oil took. Crude oil prices took over a four percent drop which made it one of oils worst trading days since last May. The weakness in oil was due to fears that the trade war tensions between the two largest economies in the world are likely to impede growth in the global economy.
Continuing Trade War Fears and Heightened Volatility
Reports came in on Wednesday that China could strike back against the potential tariffs by suspending merger endorsements with US companies. Even with the absence of major economic events in the currency market, the trade war pressures are sure to keep markets on edge. Continuing changes of the trade war could keep the instability in the markets. An absence of news could mean consolidation in the markets, whereas authorized reports could cause volatility levels to remain high. Traders should be prepared of the possibility of Donald Trump responding to china’s retaliation efforts in the trade war with more tariff pressures.