U.S. China Trade War Causes Market Uncertainty but Strengthens Pound

December 10, 2019
“In order to succeed, your desire for success should be greater than your fear of failure.”
― Bill Cosby

5-Day Change

  • Bitcoin $7,228
  • Ethereum $145.2
  • British Pound $1.317
  • New Zealand Dollar $0.654

China Tariffs Cause 100 Point Fall in Dow

Despite a Phase 1 trade deal on the horizon, investors are still wary of an escalation...especially as the tariff deadline of December 15th is soon approaching. On this day, we will see 15% import tariffs on $156 billion worth of Chinese. This news on tariffs led to a 100 point fall in the Dow on Monday, lowering gains made by a 300 point rally on Friday. What Monday’s 100 drop has proven is that China is still ‘the topic’ dominating market movements.

So the trade deal is off? Not yet, but trade deals are finicky things, and there’s going to be a lot of politicking and maneuvering before one is finally signed – even a first-stage agreement. So the tariffs will remain on the table until then even though U.S. President Trump says that they’re “doing well.

What’s China’s reaction? It may be a cliche at this point, but it always bears repeating that there are no winners in a trade war. And China has taken its share of hits, from a 1.1% drop in global exports to a nearly 25% reduction in exports to the U.S. specifically. As a result, they’re as eager to end the war as Wall Street.

Anything else besides China? China is the main story and the cause of so many recent market movements. But even it can’t obscure the fact that NAFTA is on its way to being replaced, which will most likely have a rallying effect on markets – if Trump and House Democrats manage to see eye to eye.

Wut We Think: Despite the 100 point drop, investors still seem cautiously optimistic, with some analysts pointing towards good jobs numbers and positive rumors on a trade deal. And that may be enough momentum to carry markets up for at least the remainder of the year – but if the December 15 deadline hits without a deal, then major index factors like Apple will be sorely hit by the new tariffs, and this may take the wind out of the bulls’ sails.


The Pound Sterling Isn’t Close to Dollar Parity Quite Yet

Even with Brexit looming and an election completely up for grabs, the pound has been hovering near its year-to-date peak...but that all could change in an instant depending on how the wind blows. Meanwhile, traders are jumping on any scrap of news that could help them predict how the political storm in Old Blighty will play out.

How’s all this affecting the pound? Brexit isn’t just strange political madness – it also encompasses nearly every economic sphere that the U.K. is involved with, from financial regulations to food safety. And leaving the E.U. without a deal means that the U.K. will immediately default to the WTO rules for trade – which is much less preferable than their current status as an EU member.

So a no-deal Brexit means a crash, and remain or leave means an appreciation? Basically. Analysts at HSBC have put out projections that predict $1.45 for the pound sterling in case of remain or deal, and as low as $1.15 for a no-deal – though due to the unpredictable nature of Brexit effects, other commentators have gone as low as USD parity.

So why is it rising now? In large part, it has to do with weak U.S. data than any real improvement on the British side. Brexit, while important for Britain, is not quite as influential on the world – that is, U.S. – markets as the U.S. China trade war, and as a result, bad news on that front has paradoxically improved the pound in comparison.

Wut We Think: With the U.K. general election only two days away, expect the pound to react to every movement of the polls as traders play political scientists in an attempt to predict Britain’s future. Additionally, good news out of the U.S. could further strengthen the dollar relative to the pound. But the picture will become much clearer towards the end of the week.


Trading Spotlight: Currency Swaps

Traders nowadays have a multitude of tools at their disposal to help them manage risk and to achieve more favorable terms for their investments and loans. A currency swap is one of those; a way for investors to manage the risk they may have in foreign currencies.

Currency swap: A currency swap is the exchange of interest rates, and/or principals, from one currency to another. An example could be a $1 million to €900,000 swap – this sets an implicit exchange rate of $1.00 to €.90, and an interest rate usually set by the London Interbank Offered Rate, with some adjustments. 

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