EU-US Trade War Risk is Back

MARKETS

A sense of panic has returned to markets as we begin trading on Thursday. Wall Street sold off heavily on Wednesday with the Dow Jones losing over 700 points, the S&P 500 falling 2.6% and the Nasdaq ending an 8-day winning streak. European shares did not fare any better with the FTSE 100 falling 3.1% and the DAX losing 3.4%. After a strong day on Wednesday, Asian shares look set to catch-down with the weak performance in Europe and the US.

Weakness in the euro and New Zealand dollar added to demand for the US dollar as a haven as stock markets dropped. The price of gold neared an 8-year high but has pulled back well short of the $1800 per oz. Oil prices skidded lower, dropping over 6% (after filling the gap we mentioned in yesterday’s report.)

GURU WISDOM

“Don’t worry about what the markets are going to do, worry about what you are going to do in response to the markets.” - Michael Carr

California record

7000 new cases of coronavirus, a new daily record were reported in California on Wednesday. It’s possible that after days of brushing off rising cases, investors are coming to terms with the reality that the US economic reopening might be setback. This new realisation might be necessary to unwind a sense of complacency that has taken hold in the past few weeks. 

BUT – there is a new consideration as we approach the November US Presidential election. Joe Biden has been rising in the polls amid public distrust of Donald Trump’s handing of the pandemic and protests. Biden has said he would raise US corporation tax to match income tax.

Europe Tariffs

Two reports, one that suggested the EU will impose a travel ban on the US when it opens its external borders, and two that the US is planning on a huge new wave of tariffs on the European Union were key to the change in investor sentiment. Just as investors had been taking comfort that a resumption of a US-China trade war looked unlikely, the western front of the trade war reopened. 

$3.1 trillion in new tariffs could hit the European economy in a nascent stage of a recovery from the pandemic. An EU/US trade war would, we think, hurt the euro considerably and see increased demand for the dollar as a haven. Uncertainties in EU/US trade could also harm other trade-sensitive assets including stock markets and commodities including copper.