Trump could be dragging the trade war until the 2020 US elections before withdrawing to boost vote numbers. Gold could potentially rise higher as risk-off sentiments continue to increase.
Trump vowed to slap 10% additional tariffs on US$300 billion worth of Chinese imports
Trump stunned the market last Thursday by saying he planned to increase additional levy on Chinese goods, on top of the 25% levy he has already imposed on US$250 billion worth of imports from China.
“Trump’s” card
Trump’s tweet on tariffs for China came a day after Fed had its historical rate cut of 25bps. This is the first time since the 2008 financial crisis that Fed has cut its rates. During the FOMC meeting, Powell said that the rate cut was to boost inflation and an insurance against downside risks from global uncertainty and trade concerns. Trump expressed his unhappiness by tweeting “As usual, Powell let us down…” as he felt that Fed waited too long to cut rates and was not aggressive enough.
With that in mind, it seems like Trump could be using the US-China trade war escalation to force Fed to cut rates again in September as one of the reasons why Powell cut rates was due to trade concerns. The probability of a rate cut according to the Fed fund futures market has increased from 58% on 31 July to 98% last Friday.
Moreover, Trump wants the lower interest rates to boost stocks market so as to increase his popularity figures as a stronger stocks market means the economy is doing well. In theory, cutting interest rates should boost the stocks market due to two main reasons:
- Cheaper loans allow companies to borrow more for further expansion while lowering cost of borrowing
- Fall in bond yield will push investors into the stocks market for higher returns on their money invested
We saw that the US 10-year Treasury yield plunged through 2% and ended the last week below 1.9%, a level last seen in November of 2016. Instead of increasing on lower interest rates, the stock markets turned south, with Dow Jones Industrial Average falling from a near 600-point swing from its session high. We saw further dives after the market opened today, leading to a 1075-point crash since the peak.
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Trade sensitive took it hard with retailers in particular suffering as additional tariffs would mean that consumer goods will increase in price due to the new round of levies. Furthermore, the earnings season, where companies start to post their Q2 results, saw blended earnings decline – the combined actual results for companies that have reported and estimated results for companies that have yet to report currently stands at -1%. Currently only 77% of S&P 500 companies have reported. If -1% is the actual decline for the quarter, this will be the first time the index has reported two straight quarters of y/y declines in earnings since Q1 and Q2 of 2016.
As China warns of retaliation after Trump threatened fresh tariffs, the already worsening trade war could continue to escalate into 2020. We believe that Trump will use the trade war as his final “Trump” card to gain popularity during his 2020 elections by withdrawing tariffs so as to boost the stocks market from a low due to trade uncertainties to new high. The move will lead US voters to feel “richer” as stocks markets will move higher, increasing the paper wealth of US citizens.
XAU/USD or also known as gold is traditionally seen as a safe asset to hold in times of crisis. It is currently trading at a new high at the 1453 price level. Both the escalation in US-China trade war and expectation for Fed to cut rates further will be the main driver for gold to rally. Based on the Fibonacci retracement line, we forecast gold to climb higher towards the 1545 price level by the end of the year.
Our Picks
USD/CHF – Slightly bearish.
This pair can fall towards 0.9720 as funds continue to flow into safe havens.
USD/JPY – Slightly bearish.
This pair may drop towards 105.20 as trade tensions continue to escalate.
XAU/USD (Gold) – Bullish.
We expect price to rise towards 1545 by the end of this year.
SPX/USD (S&P 500) – Slightly bearish.
Index may fall towards 2866 this week.
Fullerton Markets Research Team
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