A further escalation in the US-China trade dispute on Friday.

A further escalation in the US-China trade dispute on Friday and President Trump’s call for US companies to pull out of China triggered a major slide in risk appetite.

US equities declined rapidly with global markets also under pressure. Bond yields fell sharply with renewed inversion for the curve while oil prices registered notable losses.

The dollar retreated amid expectations of further Fed rate cuts with USD/JPY briefly posting 2-year lows near 104.50 in Asia on Monday.

Defensive assets gained strongly with gold at 6-year highs. There was a partial reversal during Monday amid more measured rhetoric from Trump with gains in equities, a net dollar recovery and reduced demand for defensive assets.

Silver resisted losses and posted 23-month highs. Sterling failed to extend the recovery while the Canadian dollar made net gains.

In his speech to the Jackson Hole Symposium, Fed Chair Powell stated that the US economy was in a good place, but that slowing growth, trade policies and muted inflation were weighing on this favourable outlook. Powell also stated that the Fed would act as appropriate and that there were no recent precedents to guide policy response to trade uncertainty.

Following the speech, President Trump again criticised the Federal Reserve and Powell with the rhetoric even more aggressive than recent episodes. The attack on Powell increased tariffs on China and warning to US companies to move out of China triggered sharp dollar losses to 2-week lows with EUR/USD advancing to the 1.1140 area as expectations of a further Federal Reserve rate cut in September intensified. There were also increasing fears that trade wars would develop into currency wars and the Euro opened higher in Asia on Monday amid wider US dollar losses.

Markets continued to monitor Brexit rhetoric during Friday, although there was little change in rhetoric and US events tended to dominate. GBP/USD strengthened to 3-week highs above 1.2280 while GBP/EUR recovered to the 1.1050.

CFTC data recorded only a slight decline in short, non-commercial positions with the total still above 90,000 contracts, maintaining the potential for sharp short-covering if political sentiment improves.
Brexit rhetoric at the G7 Summit was generally very cautious with UK and EU leaders looking to pin the blame on the other side if there is a ‘no-deal’ outcome at the end of October. Prime Minister Johnson also refused to be drawn on whether parliament could be suspended while stating that negotiations could be extended to the last minute.

GBP/EUR edged higher to 1.1050 on Monday with GBP/USD retreating to 1.2215. Opposition MPs will meet to discuss tactics to avoid a ‘no-deal’ outcome during Tuesday with Sterling little changed as UK markets re-opened.

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