US-China trade tension rises ahead of talks

Dimming optimism over US-China trade as both sides ratchets up the tensions once again sets the market on a risk-off mood while we await the Fed minutes release.

‘Stay tuned’ for Chinese retaliation

The optimism that had spread across Asia markets on Tuesday in anticipation of the US-China trade meeting will be more than erased a day later with the menacing developments between the two parties. After blacklisting eight Chinese tech companies at the start of the week, another 28 Chinese entities appear to have been brought into the picture over their role in the repression of Muslim minorities. The timing given the proximity to the commencement of trade talks on Thursday elevates the matter as a provocative move and certainly does not spell well of the US-China ties on hand. Moreover, this matter is evidently regarded as an internal affair for China, a touchy topic to broach.

China’s foreign ministry spokesperson had notably suggested that retaliation may be in the works with the ‘stay tuned’ comment. While China had been relatively quiet in the past weeks amid suggestions of US limiting investments for the former, any significant signs of retaliation may well dim the outlook on any near to medium term resolution of the trade conflict. Expect this risk-off mood to continue in the near-term for Asia markets.

Wall Street facing pressure

Notably, over and above the heightening US-China trade tensions, US data had similarly contributed to the drag on the riskier equities. September’s producer price index had unexpectedly fallen, touching the lowest in eight months in negative territory at -0.3% month-on-month. This opens up the array of concerns on the demand end and further fuels the expectation for the Fed to make another back-to-back lowering of interest rates. As far as the US market is concerned, however, one can see that the S&P 500 index appears to be threatening the uptrend support, one to watch ahead of the support at around 2872. The 5-day performance for the sectors within the S&P 500 index likewise reflect the risk-off tone with the defensives faring relatively better than the cyclicals, particularly the trade sensitive sectors.

Fed minutes will be due in the session ahead as well among other central bank updates in the session, one to watch for details after Fed chair Jerome Powell reassured the markets of its strength while expressing intent to resume expanding the Fed’s balance sheet.

Source: IG Charts

Source: Refinitiv, IG

Yesterday: S&P 500 -1.56%; DJIA -1.19%; DAX -1.05%; FTSE -0.76%

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