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MARKETS: Truce of tariffs - what will happen when clock strikes midnight on Friday?

09 May, 2019

By Han Tan, Market Analyst at FXTM

The coming hours will be crucial for markets. The paramount question of the day is – can the US and China strike a trade deal by midnight Friday in Washington, or will heightened tariffs kick in by 12:01AM?


Given the looming deadline, hope for a trade resolution appears to be waning. Asian currencies are falling against the US Dollar, while the Japanese Yen is gaining 0.1%. Risk-off mood is clearly taking a hold on equity markets across the region, as they were all trading in negative territory on Thursday morning, except for Australian and Thai stocks.

Over the course of Thursday, markets will remain ultra-sensitive to any developments pertaining to US-China trade negotiations. In the lead-up to Chinese Vice Premier Liu He headed stateside for these crucial talks, US President Donald Trump claimed that Chinese officials “broke the deal”.

Should the high-stakes negotiations produce a market-positive outcome, averting increased tariffs which threaten to further drag down global growth, this may allow global markets to breathe a huge sigh of relief and allow riskier assets to pare losses. However, should the existing 10% tariffs on $200 bln worth of Chinese goods indeed be raised to 25%, prompting “necessary countermeasures” from China, that will be a major hit to risk appetite and will force investors to reallocate global portfolios, placing an immediate emphasis on safe-haven assets.

 

Gold to find support at $1,280 floor

Amid such fraught sentiment, Gold traders may be able to rely on the $1,280 level for support over the near-term, until there is further clarity on US-China trade ties. Having already breached the $1,290 level this week before moderating, Bullion may surge past that level once again, in the event that negotiations in Washington break down and higher US tariffs kick in.

Markets will also be mindful of potentially more tariffs being imposed “shortly” on a separate $325 bln worth of Chinese goods, as mentioned in President Trump’s tweets. If that too comes to pass, it might pull the handbrake on the world’s economic expansion and give Gold prices another huge leg up.

 

Brent futures to test $69/bbl support line

Brent futures have declined by about 7% since its year-to-date high of $74.75/bbl on April 25, and have already tested the $69/bbl support level at the start of the week, as traders appear primarily driven by concerns surrounding US-China trade ties.

Should trade negotiations between the world’s two largest economies crumble, dampening hopes of a global economic rebound, demand-side uncertainties may then come to the fore and upend OPEC+ producers’ attempts to rebalance the Oil markets. Even though sanctions on Iran and the respective crises in Venezuela and Libya already threaten to further tighten global supply, higher tariffs that curtail economic and trade activity could translate into faltering demand for Oil, which in turn may give OPEC+ the green light to extend production cuts into the second half of 2019.

 

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