US-China Trade Wars May Amplify Event Risk Like China GDP, NFLX Earnings and ECB Rate Decision

US-China Trade Wars May Amplify Event Risk Like China GDP, NFLX Earnings and ECB Rate Decision

While risk trends eased up modestly into the close this past week, markets remain clearly on edge and few will hold out hope that sentiment will build up some semblance of resilience on its own.

 

• With no soothing words from the White House over the weekend for investors following last week’s reciprocal tariffs fallout, markets opened the new week highly agitated
• Amid high volatility, rumors of a 90 day pause provided recovery and were eventually overturned
• The S&P 500 closed Monday’s session little changed only after carving out the largest daily range the index had seen since 2010

Markets Grapple with Uncertainty Amid Headlines Versus High Level Event Risk

While risk trends eased up modestly into the close this past week, markets remain clearly on edge and few will hold out hope that sentiment will build up some semblance of resilience on its own. Whether provoked by a scheduled economic event, a sudden air pocket in a key market or a headline around the further erosion of globalization threatening the outlook; it is likely that the prod can translate into substantial market movement even among the most liquid risk-oriented favorites or safe havens.

Chart of Google Trend Searches Worldwide for ‘Tariffs’, ‘Inflation’, ‘Employment’ and ‘GDP’ (Weekly)

Source: John Kicklighter, Google Trends

 

If we were to rank for influence the fundamental tides, it is likely that trade wars and tariffs remain the principal concern. That can be mean a headline for further escalations – or de-escalations – in the tariffs between the United States and China or mere interpretation of scheduled event risk through the lens of what this economic stand off could mean for important macro series and their course forward. In fact, if we consult Google’s search trend measure; globally, the search for ‘tariffs’ recently has dwarfed any interest in ‘inflation’, ‘employment’ or ‘GDP’ at any other time over the past 15 years. That is quite the amplifier.

Calendar of Top Global Macro Event Risk

Source: John Kicklighter

 

China Q1 GDP: What Will It Really Offer as Context to US-China Trade Wars?

With trade wars as the backdrop, the release of China’s advanced Q1 GDP update would seem a particularly potent event on the calendar with its Wednesday morning release. However, there are a number of caveats to consider with this particular report. Fundamentally, this data point is likely to draw considerable attention given the sheer escalation of the trade war between the China and the US. The bite of a 145 percent tariff by the US on Chinese goods and 125 percent by China on US imports will be increasingly weighty as long as the barriers are maintained. Yet, as important as the health report for the second largest economy is to the country’s own assets and the global economy in general, there exists some important qualifications to consider for market reaction.

One enduring consideration with data that originates from Chinese groups is an undercurrent of skepticism around the veracity of the data. There is a lingering concern in the west that the data is ‘dressed’ to send a soothing or shaped message to the global markets. Whether true or not, increasing or decreasing; the questions follow the data. Less controversial is the fact that the recent, intense tariffs will not show well in the first quarter data. While the US has started to raise the pressure on Chinese trade since back in February, the truly intense measures haven’t kicked in until the past few weeks. That said, if the Q1 data is weak even before the dominant exogenous factor kicks in, it could seriously unnerve the market as to what is ahead. For a forecast view of China’s economic course without governmental sway, the IMF’s updated World Economic Outlook the following week may prove more authoritative – as long as this is still a leading fundamental concern, which seems a high probability.

Chart of USDCNH Overlaid with Trade War Events Highlighted (Daily)

Source: John Kicklighter, TradingView

 

Earnings Season Continues with Trade-Oriented Firms, TSM and Netflix

Another theme that will be adapted from its normal market-influence to be colored by trade wars concerns is the second week of US earnings of the season. In the first few days of the week, we will extend the banks reporting including Goldman Sachs on Monday and Bank of America on Tuesday. As with JPMorgan and the other large financial players this week, the interest is less on what their previous quarter reported and more around their forecasts for what is ahead – and particularly their outlook for the economy and markets. On Wednesday, earnings will close in more distinctly on the fallout from trade wars. After the close, we are due the figures from CSX and Alcoa. The former is a shipping/rail company that can offer insight into the general health of trade while the latter is one of the largest aluminum producing companies in the US (and world). Tariffs targeted on imported aluminum and steel should reflect clearly in this group’s numbers and forecasts. Thursday will generate perhaps the peak headline potential for corporate reporting directing market response. In the morning, the Taiwan Semiconductor Manufacturing Company (TSM) should reflect President Trump’s stated intent to shift reliance for the important technology component to the United States. On the topic of tech, however, Netflix’s quarterly performance metrics after the close Thursday will be top listing. While the former FAANG member is not in the current favorite Magnificent 7 clique, it is still the 18th largest US stock by market cap and an outperformer relative to the Nasdaq 100. It will be considered a harbinger for what is ahead for the larger market cap tech stocks, but don’t forget that it will come at the end of the week in volatility terms owing to Friday’s exchange closure for the Good Friday market holiday.

Chart of Netflix, Netflix – Nasdaq 100 Ratio, Nasdaq 100 – Dow Ratio (Daily)

Source: John Kicklighter, TradingView

 

What are the World’s Central Banks Doing in the Face of Trade Wars and Growth Fears?

Another notable theme in event risk to monitor over the coming week is the path of monetary policy. Will central banks act proactively to offset the expected inflation to result from trade wars or is their concern more about faltering economic potential with a need to provide liquidity? There is also the concern around liquidity which a few FOMC members tried to reassure this past week that they would monitor diligently, ready to act should there be any sign of stress in the system. Event risk like the New York Fed’s consumer inflation expectations figure Monday will be working against the diametrically opposed perspective between the weaker-than-expected CPI release and the University of Michigan’s consumer confidence inflation forecasts – which swelled to its highest level since 1981.

That popular measure’s survey period ended on April 8th which didn’t account for President Trump’s 90 day pause for most countries facing reciprocal tariffs, so the verdict is still out. For scheduled central bank rate decisions, we are looking a few groups due to weigh their situation. The Bank of Canada, South Korea Central Bank and Turkish Central Bank are all on tap and expected to hold rates according to economists’ consensus. The BOC and TCMB are expected to hold their respective benchmark rates unchanged. The South Korean central bank is expected to lower its benchmark by 25 basis points to 2.50 percent, but it is the ECB’s anticipated quarter percent cut to 2.40 percent that will carry the most global weight. Again, this is a Thursday event risk before a long liquidity drain, but what this group does in contrast to its major peers (Fed, BOE, BOJ) and implications to global growth will carry weight into the following week and beyond.

Chart of EURUSD Overlaid with the EU-US 2-Year Government Yield Differential (Daily)

Source: John Kicklighter, TradingView

 

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---- Written by John Kicklighter, Global Head of Content