Last week began with U.S. and global equities under pressure due to increasing trade tensions with China, but then reversed course on an easing of tariffs with Canada and Mexico. Trading in global markets is currently very difficult due to the news headlines, and the potential to be whipsawed is significant. In this volatile environment, I monitor a few key indicators to determine the potential intermediate direction of markets.
To estimate the impact of the trade tensions with China, I am closely tracking the value of the yuan and the ongoing saga with Chinese telecom giant Huawei as key indicators. The offshore yuan is trading very close to the psychologically important level of seven yuan to the dollar. If this level is broken and market forces or the Chinese government devalue the currency to offset the impact of tariffs, I expect it will coincide with downward pressure in global stocks. I anticipate speculators will add more pressure to the People’s Bank of China if the currency is devalued.
Additionally, the high-profile showdown with Huawei is a wild card in the trade dispute with China. The potential impact of the crackdown on U.S. equipment sales to Huawei could disrupt companies around the globe and be viewed very negatively by the Chinese government.
I remain cautious in this environment as a trade deal seems far off, and the impact of recent tariffs and the Huawei crackdown will take a while to play out.
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