Trade war fears return ending 4 day rally

The FTSE plummeted 1% in Wednesday’s session, hitting a nadir of 7587 in response to an escalation of the US – Sino trade war, ending a 4-day rally. A pause in trade rhetoric from the White House, had seen stocks climb over the past 4 sessions, however the threat of tariffs on an additional $200 billion worth of Chinese imports has since sent equity indices lower, on both sides of the Atlantic.

European bourses have fared worse that US indices with the Dax down close to 1.5% whilst the S&P and Dow Jones are managing to keep losses in the region of 0.5%, and the Nasdaq is down just 0.3%. With the unofficial start of earning season just days away, optimism over Q2 earnings is managing to provide some support to Wall Street in the face of the unfolding trade war.

Traders are now waiting for China’s reaction, other than the words of shock that they have expressed so far. A tit for tat response it almost guaranteed and the markets will stay jittery until there is more clarity on what will come next. However, as with last Friday’s tariff announcement, flows into safe haven assets have not been as strong we might expect. The dollar is just marginally stronger versus its peers and safe havens the Japanese yen and gold are actually trading lower on the day.

Oil dives on supply increase and demand fears

Oil majors Shell and BP have taken a hit as they trace the price of oil lower. Concerns that trade tensions will hit demand, plus surging output from Saudi Arabia has wiped 2% of the price of oil. OPEC agreed in June to ease production cuts and start raising output, meanwhile supply continued to decline in Venezuela and Libya. However, the forecasts used by OPEC to adjust the production output were made under the assumption that trade tariffs were not increased, and the current trade tensions were resolved. Clearly that is not the case, an escalation of trade tensions could quickly hit demand for oil; decreasing demand and increasing supply could see Brent target $75 per barrel.

Canada lifts rates

The Bank of Canada lifted rates for the first time in 6 months to 1.5%. This is the highest-level rates have been since 2008. Strong demand for exports and rallying commodity prices have supported the economy. Yet, whilst the move was broadly expected by the market it comes at a time of uncertainty surrounding the North America Free Trade Agreement and Canada’s trade dispute with the US. The Canadian dollar spiked sharply lower versus the dollar but has since recovered.

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