Written by Han Tan, Market Analyst at FXTM
The US-China tariff truce didn’t live up to its hype, as the surge in risk sentiment at the start of the week proved fleeting. Investors were swiftly reminded about the fragility of global economic conditions just days after the G20 summit, as they were served with a slew of manufacturing data that pointed to contracting factory activity across Asia and Europe.
Risk aversion continues to play out across various asset classes, as seen in the rising demand for safe-haven assets this week. Gold had a short-lived spell below the psychological $1400 mark before surging, the Japanese Yen didn’t weaken past the 108 level against the US Dollar for long, while the yields on 10-year US Treasuries have since declined to sub-2% levels.
Heightened US-China trade tensions averted, for now
The outcome from the highly-anticipated meeting between US President Donald Trump and Chinese President Xi Jinping at the G20 summit last week merely offered temporary relief that a further escalation in trade tensions had been averted, for now. However, the tariffs that had been imposed on global trade are still intact, and will continually dampen global economic growth as long as they are in place.
In the days following the G20 summit in Japan, the US administration then imposed a 400% levy on Vietnamese steel, while threatening more tariffs on $4 billion worth of EU goods. This was a stark reminder that US-led trade tensions against other economies remain a major risk that markets have to continually contend with.
Market uncertainties to support safe-haven demand, while limiting upside for risk assets
Investors cannot discount the possibility of the US-China tariff truce giving way at any time, as recent history has shown that negotiations remain fluid and unpredictable. Given such persistent uncertainties, investors have been shoring up their exposure to safe-haven assets, which lends for a supportive environment for the likes of Gold, the Japanese Yen, and US Treasuries.
Although risk assets have been buoyed by the prospects of monetary stimulus out of major central banks, with hopes that the lowering of interest rates can help offset the downside risks to the global economy, such gains, however, could rapidly come undone, should global trade tensions spike once more.
Until the world’s two largest economies can come to a concrete and lasting trade deal, one that alleviates the downward pressures on the global economy, market participants would remain wary about venturing further out into risk-on waters. Such sentiment is expected to limit the upside for riskier investments, such as Asian currencies and emerging-market assets.
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