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US-China tariffs threat returns

The return of the US-China trade issue into the picture looks set to cap gains for markets that had rallied against the back of a series of positive factors since the start of the week.

Trump attempting to secure the G20 meeting with tariffs

Indeed, we have seen Wall Street return at the start of the week to continue cheering the Mexico deal and prospects of Fed cuts, though keeping the gains moderate. The risk-on mood had also continued to boost the cyclicals as seen on the sectoral breakdown of the S&P 500 index from Monday.

That said, while the contemplation of tariffs as a trade negotiation tool with Mexico had yet to halt, we have certainly seen the US-China trade issue returning to the table to mar the outlook for markets into Tuesday. To recap, President Donald Trump had threatened to hike tariffs on Chinese goods to ‘much higher than 25%’ should President Xi Jinping not agree to a meeting with him at the G20, sounding much like a positioning move.

We may once again be attempting to play political analysts here, but the seemingly complicated matter of a US-China trade deal appears highly unlikely to be resolved from a high-level meeting between the two Presidents. The best result that could be yielded from such an event may be the last G20 where a trade truce would be declared, and negotiators return to the table to spark another bout of market rallies as we have seen at the start of 2019. As such, President Donald Trump’s latest threat does appear to be one working towards that ‘win’. The complication, however, would be China’s stance given the apparent interest to undermine China’s ability to lead in the areas such as 5G and the coercive statements suggesting that China will ‘have to make a deal’.

Asia open

Given the return of the US-China tariffs threat to the table, look to Asia markets to waffle along into the Tuesday session. As mentioned above, we have had a series of positive factors to kickstart the week including the surprise in China’s trade data. Exports had outperformed at 1.1% year-on-year against the market’s expectation for a decline while imports slipped, altogether building a strong trade surplus for May. There is, however, some sense that this could have been a result of front-loading thereby warranting continued caution into June. The external picture is unlikely to have improved in May given the backdrop of aggravated trade tensions between US and China among other trading partners.

A series of tier-2 data is expected in the day while the watch will also be on any rebuttal from China following the tariffs threat. The risk-on, risk-off play looks to have been little changed this morning based on the risk barometer USD/JPY’s contained movements. Any escalation on China’s end however puts the $108 level back on the firing line.

Source: IG Charts

Yesterday: S&P 500 +0.47%; DJIA +0.30%; DAX +0.77%; FTSE +0.59%

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