Trade conflict escalates

Overnight, European and U.S. equity indices extended recent gains with the S&P 500 closing at a 4-month high. Shortly after the U.S equity market closed, headlines hit the wires that the U.S. will soon publish a list of new tariffs on US$200 billion worth of Chinese goods. According to the source of the story, the list could be published as soon as today and likely by the end of the week. Keeping in mind that last week the Trump administration indicated that the United States may ultimately impose tariffs on more than US$500 billion worth of Chinese goods, roughly the total amount of U.S. imports from China last year.

Despite the strong economic backdrop provided by Friday nights better than expected U.S. jobs report, a positive start to second quarter earnings season, as well as stock buybacks which will underpin the market, the tariff headlines are a reminder that sentiment in risk assets such as equities can turn very quickly. U.S. midterm elections are due in November of this year, and the opportunity to garner electoral support via a better deal with China, means it is unlikely that the Trump administration will allow the subject of trade and tariffs to drift too far off the public and the markets radar in coming months.

This morning’s news, leaves prices starting to retrace away from some key technical resistance levels which traders can use as pivot points to safeguard trading views. Two of the key markets, I am currently watching are outlined below.

The best measure of risk sentiment, in my opinion, remains the S&P500. Hence while it’s not a market I trade actively in, it is certainly a market I watch very closely. As can be seen on the S&P 500 chart below, prices have started to turn away from the 2800/10 resistance zone. On the downside, initial support is viewed 2740. Below here, is key medium-term support in the form of the 200-day moving average 2680, followed by long-term trendline support at 2650.

A break of either 2810 or 2650 is needed to provide the S&P 500 with the momentum to break the strangle hold of the cross currents mentioned above.

USDJPY is also in an interesting position. It is currently encapsulated within a narrowing range, which provides some clear levels to work with.

After falling back below 111.00 this morning, there is the possibility of a double high forming 111.35/40. Not far above, trendline resistance drawn from the December 2016 high of 118.66 coming in at 111.70. On the downside, the most important level is the trendline support drawn from the March 2018 104.64 low, which is coming in 110.20 area.

After both the S&P500 and USDJPY tested key topside levels yesterday, the markets focus should turn to the support levels mentioned above as we await China’s response to the latest escalation in the trade conflict.

Source Tradingview. The figures stated are as of the 11h of July 2018.  Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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