The week seems to start with a further decline in the stock market, where the sell-off of futures contracts on major US indices is around 0.5 percent. This is the same continuation of the declines we saw last week. The escalation of the trade conflict and the lack of chances for its de-escalation affect many markets.
The risk of recession has recently increased due to the increase in tension between the US and China, as well as after the announcement of the imposition of tariffs on Mexico last week. What's more, China has accused the United States of being fully responsible for breaking up trade talks. According to Morgan Stanley, a recession could occur within nine months if President Donald Trump imposed another 25% tariffs on other Chinese products worth $ 300 billion, and China would also retaliate in trade policy. On the other hand, the recession rate calculated by the Federal Reserve from Cleveland increased to around 40 percent.
As a result, we can observe a sell-off of stocks and a potential sharp drop in oil prices, where fears about a drop in demand seem to be the main factor in the price collapse. In the currency market, the main currencies that can still react to the escalation of the conflict are the Japanese yen and the Swiss franc. Although the strengthening of the latter may be closely monitored by the SNB – the Swiss central bank, which, if the CHF would be overrefined again, could intervene even verbally.
On the other hand, the positive news at the beginning of the week is the PMI reading for the Chinese industry. PMI unexpectedly reached 50.2 points in May and has not changed in relation to the previous month. It was also a reading above the market consensus at 50. The production was fundamentally stable, despite a faster growth in the number of new orders and a further increase in foreign sales. Nevertheless, these data could only slightly inhibit the increase in risk aversion.
Today in the macroeconomic calendar we will face a whole series of PMI readings, and tomorrow in the morning the Bank of Australia decision on interest rates, where the market consensus may point to a potential cut to another record low.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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