Daily Commentary BY THE CURVE TEAM –

China Answers Back

26th of March, 2018

Volatility remains front and centre as we enter a new week as geopolitical tensions continue to rise. There was a fair bit to take in over the weekend as the threat of uncertainty continues to grow.

It was a culmination of events that resulted in equity markets, particularly those in the US, tumbling to close the week with their biggest weekly loss in since 2016.

Of particular note, there was a jump in risk off sentiment as the prospect of a global trade war gathers momentum. The tit for tat behaviour from China and the US took another step forward as China announced its retaliation against US President Trump’s proposed tariffs.

While there was talk of the Chinese imposing protectionist policies of their own, what was particularly interesting came from comments from the Chinese Ambassador to the US, Cui Tiankai. He noted that a possible retaliation would be to scale back the purchase of US Treasuries.

The US relies heavily on China in this sense, with China holding close to 19% of all foreign holdings of US government securities.

The prospect poses a real threat to the Fed, who is in the process of trying to reduce the size of its balance sheet as it normalises monetary policy settings. With tax cuts on the way and a reduction of revenue, the US will need as much demand from foreign parties as it can get.

With little out this week in the way of data, markets will be watching carefully as this unfolds. Important to note however, is that China has expressed that they do not seek to start a trade war, but will respond necessarily if the situation escalates.

Oliver Parsons

Client Relationship Manager