Pre-Market: Trade War Fears are Back with a Vengeance

Stocks are globally lower after yesterday’s relief rally, with the main US indices opening in the red after an eventful overnight session. Equities Europe and most of Asia also lost ground, with the Japanese Nikkei being the positive outlier, and as the Dollar rallied off its early lows, emerging market currencies are also under pressure again, even as the recent lows are not in danger in the battered segment.

China officially requested the WTO for permission to counter the wave of US tariffs in an attempt to open a new front in the US-China trade skirmish. Donald Trump escalated the war verbally yet again on Friday, and as China is more and more cornered with regards to trade countermeasures, broadening the scope of the conflict is likely the only way for the country.

Hang Seng Index, 4-Hour Chart Analysis

This could mean currency devaluation, selling of US Treasuries or something else, but for now, it’s hard to see a quick solution, especially as the was rhetoric helps the US President in dealing with his political troubles on home soil before the midterm elections. What’s sure, is that financial markets continue to signal trouble for China, with the Shanghai Composite threatening with new bear market lows, and the Hang Seng index in Hong Kong joining the mainland benchmark in bear market territory today.

S&P 500 Futures, Daily Chart Analysis

The S&P 500 erased yesterday’s gains in pre-market trading, and it’s close to hitting three-week lows after last week’s pullback, as the broad global weakness is slowly taking its toll on the market-leading US indices.

The main Wall Street benchmarks are still very close to their all-time highs, and with the central bank meetings ahead, a few dovish surprises could still propel them to new highs, even as valuations are hostile, and the divergences between the key global markets are at record levels.

Dollar Still Looking for Direction before Central Bank Bonanza

Dollar Index (DXY), 4-Hour Chart Analysis

The short end of the US yield curve continues to rise, with the 2-year yield hitting another 10-year high today, as rate hike odds are still on the rise thanks to the recent inflationary signs. This doesn’t bode well for the troubled emerging markets, and although the Dollar is struggling to gain ground on the Euro and the Yen as of now, the forces behind the Greenback’s rally are just getting stronger.

The next week could see strong moves in currencies, and if the ECB fails to show signs of hawkishness countering Fed’s tightening policies, another leg higher in the reserve currency could be ahead, which could send markets into turmoil again.

AUD/USD, 4-Hour Chart Analysis

While commodities are mixed today, and the Dollar is virtually unchanged, commodity-related currencies, especially those with strong Chinese ties are under pressure, and both the Aussie and the New Zealand Dollar are trading at levels not seen since early 2016 compared to the USD.

The continued weakness in copper contributed to the downtrend in the AUD/USD, and now the pair looks ready to test the psychologically crucial 0.70 level after two and a half years, as the risk-off trends outside the US are still apparent.

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Trader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.