The Trade War Continues But An Extended Reaction Is Absent

Market participants witnessed or were part of a 180° reversal of market sentiment this morning with equities moving substantially higher, and safe-haven assets such as gold trading lower.

Fundamentally not that much has transpired since yesterday’s dramatic selloff in U.S. equities and upside spike in gold prices. However, today it seems investor psychology is either not focusing on the potential for a trade war or is in complete denial that further escalation between the two superpowers is an extremely possible outcome.

The initial reaction to yesterday’s announcement by the Chinese government regarding tariffs on 128 categories of goods imported from the United States took U.S. equities lower and gold pricing higher.

With U.S. equities returning into favor and a small bounce in the U.S. dollar, gold pricing drifted substantially lower giving up most of yesterday’s gains.

In an interview with MarketWatch, Fawad Razaqzada, technical analyst at Forex.com said, “Gold has given back some of its sharp gains from yesterday. As well as a slightly positive tone in the stock markets, the dollar has rebounded against both the euro and the yen.”

However, it is highly unlikely that the repercussions of the current trade dispute and real probability that this dispute will evolve into a trade war are over. On March 22, President Trump added technology imports as the next tariff target.

As reported by Reuters yesterday, “The Trump administration this week will unveil a list of advanced technology Chinese imports targeted for U.S. tariffs to punish Beijing over technology transfer policies, a move expected to intensify trade tensions between the world’s two largest economies.”

The question becomes whether or not these additional tariffs on technology and the transfer of U.S. intellectual property will prompt the Chinese to retaliate with a more measured response then yesterday’s announcement of Chinese tariffs imposed on approximately $3 billion of U.S. imports.

Currently tariffs imposed by the Chinese account for approximately 2% of U.S. exports to China. The most substantial damage will be felt by pork producers in the United States who now will face a 25% tariff, as well as fruit farmers facing a 15% tariff on American fruits.

Once the administration announces the full extent of technology and intellectual property tariffs, the trade dispute between China and the United States could morph into an out and out trade war.

Wishing you as always, good trading,