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Equities Bleed As Trade War Woes Induce Fears of Recession, Bonds Rally

bank of canadaAs trade war tensions escalate in the global market, investor’s fears for possibility of global economic recession takes centre stage resulting in bonds gaining momentum while equities and risk assets bleed red.

Summary: As trade talk related tensions between US and China remain in a deadlock, traders worries about possibility of recession in global economic growth grows. This has resulted in bond market seeing a sharp spike in activity which is also reflected in Equity and forex markets across the globe which saw major risk assets bleed in red today. Risk averse investor sentiment is beginning to gain high level of market share with each passing day as political power struggle via economic means has taken a huge toll on major economies and emerging markets alike. Given USA’s unusually high dependency on import of rare earth metals from China, recent headlines from the country’s newspaper hinting at possibility of China cutting back on rare earth metal supply to US as a form of fighting back against US tyranny has caused fresh wave of bearish influence to hit market. European markets which have not yet recovered from possibility of EU imposing fine on Italy got additional pressure from Chinese headlines causing yet another session to fall under bears grip. As scenario progresses, unless one of the two parties involved in trade war decides to submit which seems highly unlikely at the moment, global economy is set for a long and hard summer ahead.

Precious Metals: As safe haven demand saw a boost influenced by headlines in Chinese daily newspaper, aside from bonds, precious metals also gained positive momentum. Both gold and silver traded with positive bias across Asian session and has managed to retain early gains for better part of European market hours which given the current market scenario and investor sentiment in the broad market is likely to continue for rest of the day.

Crude Oil: Crude oil price fell sharply in the international market as investor sentiment turned dovish and broad based market activity saw risk aversion owing to trade war woes escalating to new highs. Headlines hinting at China retaliating for US threats via rare earth metals exports caused risk aversion in market to outweigh positive influence from supply disruptions in middle east causing major international crude benchmarks to decline more than 1% today.

USD/JPY: The pair is experiencing see-saw pattern today as risk aversion induced demand for safe haven assets support bulls of both currency pairs. While JPY gains demand on its nature as a default safe haven currency, USD gains owing to sell-off in the broader forex market which is supporting bulls for both pairs resulting in deadlock scenario. While JPY may gain upper hand every now and then on risk aversion, unless 109 handle is breached and price declines further below, the pair is likely to regain momentum in favor of USD.

On The Lookout: Headlines on geo-political and economic issues retake centre stage post EU parliamentary elections result announcements made yesterday. While US has taken a direct approach on its threatening activities when it comes to U.S.A, China has taken a roundabout way to warn US on its sufferings should China choose to retaliate. US companies are already facing loss owing to trade war with China and given US economy’s reliance on unusually high imports of rare earth metals from China, a blockade of exports in rare earth metals combined with tariffs on US goods in China could cost US companies to lose several billion dollars in a matter of days which could be highly devastating for US economy. Meanwhile, political climate in Europe is no better with Brexit at standstill while Italian debt woes roil the market causing global economy to dive deep into bear’s territory. Investors’ main focus in short term is on Bank of Canada’s interest rate decision update which is scheduled to release later today and on US API weekly crude oil inventory data.

Trading Perspective: Given risk averse investor sentiment in the broad market and implications of what Chinese decision to retaliate could cost US economy, Wall Street is likely to see bearish price action while forex market sees bearish action continue across American market hours.

US Market: As trade tensions escalate over Chinese headlines, risk aversion rules broad market. Traders have opted to sell-off risk asset holdings and divert funds to safe haven assets and bond market. Meanwhile news that U.S. Treasury is targeting nine other nations over currency practises and trade deficit added to risk aversion. Benchmark index futures trading in international market ahead of Wall Street opening saw dovish price action suggesting subdued price action in Wall Street today with possible prevalence in bearish bias.

EUR/USD: The common currency fell against US Greenback in the broad market today on risk aversion over trade war woes. Trade war worries escalated on Chinese daily’s headlines hinting at retaliation against US in form of blockading rare earth metal exports. Further, warnings from ECB’s Rehn on further delay in rate hike plans and disappointing EU macro data caused the pair to see bearish nose dive. The pair is likely to retain bearish bias as trade war woes are likely to escalate in near future trading sessions.

USD/CAD: The pair gained positive momentum in the broad market as crude oil price fell sharply. Escalating trade war woes outweighed support from supply disruptions in Middle East causing crude oil price to fall sharply in both global crude oil benchmarks. Further, investor’s caution ahead of Bank of Canada’s interest rate decision update scheduled to release later today weighed down CAD bulls resulting in USD gaining upper hand. Investors are also on lookout for US weekly crude oil stock pile data which could decide the momentum of the pair for the rest of the week.