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Here’s How Traders Are Reacting to the Latest Trade War Escalation

Cormac Mullen
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Here’s How Traders Are Reacting to the Latest Trade War Escalation

(Bloomberg) -- Another Monday after a weekend escalation in the ongoing U.S.-China trade war and markets are roiling.

These charts show how traders took the latest salvos in the intensifying trade battle between the world’s two-largest economies.

S&P Futures

Having already closed down over 2% Friday, S&P 500 futures took another leg lower, dropping as much as 1.6% before paring losses. The contracts have fallen to test the uptrend in place since the beginning of the year.

“Aftershocks from the latest round of tariff increases announced by Beijing and Washington on Friday will continue to rock global markets when they open on Monday,” said Gavekal Research’s Randhir Prakash. “The silver lining for investors is that each successive round of tariffs in Trump’s trade war has had a smaller, and shorter-lived, negative impact on U.S. stock prices and volatility.”

Yen

The Japanese currency climbed as investors sought traditional havens. The yen rose above the 105 per dollar level and the January flash-crash high, to the highest since 2016.

“Speculators will continue to push up bids for the yen,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities Co. in Tokyo. “Japan’s authorities are likely to take a wait-and-see stance for now, but a rally above 100 per dollar could see some response”

Yuan

China’s currency put even more distance between itself and the 7 per dollar level as the offshore yuan was quoted at an all-time low. It traded at 7.17 in early Asia trading Monday.

“The latest round of tariff announcements” that came out on Friday “imply moderate further escalation and raise some risks of more escalation to come, which make us cautious in the very short-term,” Ebrahim Rahbari, Citigroup’s global head of currency analysis, said in a note. The yuan “is likely to weaken further” with the offshore yuan to reach 7.5 in coming months.

Bonds

Ten-year Treasury yields dropped to the lowest since August 2016 and equivalents in Australia and New Zealand also sank.

“Given the proximity to all-time lows set around the Brexit vote in 2016, we believe the probability of U.S. 10-year yields revisiting (and going through) those levels has risen substantially,” said strategists at Goldman Sachs Group Inc. including Praveen Korapaty.

Turkish Lira

The move in the yen sparked another flash crash, this time against the Turkish lira. It suggests Japanese retail investors were caught out by the yen’s strength -- the lira fell as much 12% to the lowest since Aug. 2018.

“Given the lira’s nature as a high volatility currency, the surge in the yen must have triggered stop-losses this morning, ”said Toshiya Yamauchi, chief manager for foreign-exchange margin trading at Ueda Harlow Ltd. in Tokyo.

Volatility

In Japan, volatility on the Nikkei 225 Index jumped over 20% for the fifth time in a year. The Cboe Volatility Index closed 19% higher on Friday.

“The trade war between the U.S. and China is now escalating at a bewildering pace, which is likely to trigger further market volatility,” said Patrick Wacker, a fund manager for emerging-market fixed income at UOB Asset Management Ltd. in Singapore.

(Updates with comment on yuan, chart on volatility.)

--With assistance from Masaki Kondo, Joanna Ossinger and Netty Ismail.

To contact the reporter on this story: Cormac Mullen in Tokyo at cmullen9@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Adam Haigh, Andreea Papuc

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