With Two Tweets, Trump Shatters Historic Calm in Global Markets
(Bloomberg) -- In the end, all it took was two tweets from Donald Trump.
After weeks of warnings from many on Wall Street that price swings across global markets were too subdued, the U.S. president’s threat to boost tariffs on China sent volatility soaring Monday. U.S. stock-index futures slid more than 2 percent, and the Shanghai Composite Index fell as much as 4.1 percent. May futures on the Cboe Volatility Index jumped 15 percent.
Whether they were a negotiating tactic or a sign of something more ominous, Trump’s tweets jolted markets that had been lulled in recent weeks by signs of progress in trade talks, a dovish turn by the Federal Reserve and better-than-expected corporate earnings. Investors who had grown accustomed to cross-asset volatility at or near historically low levels were once again forced to consider that all might not be smooth sailing.
“Trade had been put to the side by many market participants,” Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs Group Inc., said on Bloomberg Television. “Market pricing assumed there would be some kind of a deal, and no further escalation in tariffs. And meanwhile the growth outlook was actually improving.” Now, “this raises the specter of a significant hit to growth should these tariffs escalate and should the uncertainty associated with that weigh on investment going forward,” he said.
Read more about traders’ reaction to the return of “Tariff Man”
“It might not be as bad as it looks” but it’s “very likely to undo all of the positive momentum we’ve seen,” said Michael McCarthy, chief market strategist at CMC Markets Asia Pacific Pty in Sydney. The question is whether this is “a last-minute negotiation tactic” or will mark a breakdown in the talks, he said.
Nomura Holdings Inc. strategist Charlie McElligott said it’s possible the S&P 500’s recent run-up to record levels might have given Trump enough confidence “to absorb a market drawdown and again lean into what some in the administration believe is Chinese ‘slow-playing’ -- all in an attempt from to extract additional last-minute deal concessions.”
Goldman economists Alec Phillips and Blake Taylor put the odds of tariff increases on Friday at 40 percent, still seeing a deal as more likely than not. China is considering delaying the trip of its large delegation to Washington this week, according to people familiar with the matter, however, and the Goldman analysts warned that a cancellation would make a tariff hike the “base case.”
“The key thing now is China’s response. It’s hard to see them folding and taking it on the chin,” wrote Kay Van-Petersen, global macro strategist at Saxo Capital Markets Pte. in Singapore, in a note to clients. “A scenario where we get a -3 percent to -5 percent pullback in the S&P 500 & limit down in China equities” is possible, he wrote. Currencies, interest rates and commodities could also be roiled, he said.
On the foreign-exchange side, Australian and New Zealand dollars could prove particularly vulnerable within the G10.
“We will see some really significant downside corrections to the Aussie and Kiwi and a massive upturn in volatility,” if talks break down and the Chinese team doesn’t go to Washington, said Nick Twidale, chief operating officer of Rakuten Securities Australia Pty in Sydney.
Declines in equities could breed yet a further sell-off thanks to the role of quantitative players.
Moves by commodity trading advisers, or CTAs, could be triggered around 2,879 on the S&P 500, according to Nomura’s McElligott. That level would be about a 2.3 percent drop from the gauge’s close on Friday. The futures were at 2,893.75 as of 10:20 a.m. in Hong Kong. Another “acceleration point where moves could get sloppy” is 2,890, a level important for some options strategies, he wrote.
The key is whether the tweets prove to be an epic incidence of poker playing or “a raging miscalculation with vigilante markets,” McElligott said.
--With assistance from Jackie Edwards, Masaki Kondo and Adam Haigh.
To contact the reporters on this story: Joanna Ossinger in Singapore at firstname.lastname@example.org;Michael Patterson in Hong Kong at email@example.com
To contact the editors responsible for this story: Christopher Anstey at firstname.lastname@example.org, Divya Balji
©2019 Bloomberg L.P.