Risk in retreat

Risk-aversion is rising as US Treasury yields, equity indices and oil prices fall. FX markets are nervous thanks to Brexit and UK political woes, uncertainty around the new European Parliament, Italian budget questions and the ongoing US/China trade war.

It all has a bit of a “Chicken Little” feel about it. But is the sky really falling? Is another 2008-style crisis just around the corner?

Probably not. The story that China may use exports of rare earth elements to the US as a weapon in trade negotiations has traders on edge and contributed to the drop in equity prices and gains in the Japanese yen and Swiss franc. A week ago, an RBC analyst pointed out that China tried to use its rare-earth clout against Japan in 2010.

It didn’t work out very well for them as they lost market share to other countries and as many corporations can attest, once market share erodes, it’s hard to get back.

The market reaction seems to be exaggerated due to the lack of top-tier economic data availability this week and a cone of silence around Federal Open Market Committee officials. That changes starting Thursday with the release of US March GDP followed by German inflation and US PCE data on Friday.

Wall Street indices took it on the chin at the opening bell. The Dow Jones Industrial Average, S&P 500 and Nasdaq shed around 0.80% in early trading on continued trade war jitters and recession fears sparked by the inverted yield curve.

The US dollar is marginally higher across the board in New York trading, underpinned by risk-off and gaining additional support from the weak equity market profile. The US dollar index (USDX) is almost fully recovered from Wednesday’s plunge. The uptrend is intact while prices are above 97.20.

The Bank of Canada did as universally expected and left interest rates unchanged. The accompanying statement was somewhat positive until the discussion on the global economy. The BoC said “the recent escalation of trade conflicts is heightening uncertainty about economic prospects".

In addition, trade restrictions introduced by China are having direct effects on Canadian exports. USDCAD soared an smashed through resistance at 1.3520, opening the door to further gains to 1.3580 and then 1.3670. However, failure to extend the rally would be considered a false break and the trading would revert back to the 1.3370-1.3520 band.