Markets In Turmoil After US-China Trade Escalation. What’s Next?

五月 21, 2019 01:44

US-China trade relations have escalated to a historic - and fearful - level. After the US launched an investigation into Chinese trade policies in 2017, not many analysts believed negotiations would ever get this bad and cause such widespread market turmoil. Yet for some, it is only the beginning.

In this article, we discuss the current US-China trade situation, the markets reaction and the possible ways to take advantage of some of the biggest moves we've seen for some time. Let's get started!

A Quick Guide to the US-China Trade War

In 2017, the US launched an investigation into Chinese trade policies regarding intellectual property, alleged government-sponsored hacking and infiltration into US companies to gain access to new technology, among many other issues.

Since then, the US has imposed three rounds of tariffs on more than $250 billion worth of Chinese goods. China retaliated in kind in 2018 with tariffs on US imports on around $110 billion worth of goods. However, both countries agreed to halt new trade tariffs in December to allow for talks which have since, not gone well.

On Friday 10 May, the US went ahead and raised tariffs from 10% to 25% on $200 billion worth of Chinese goods. And, even after Trump threatened China to do a deal now or face worse consequences in his second term, China has already announced retaliatory measures by raising tariffs on $60 billion worth of US goods.

The Markets Response to US-China Trade Escalation

The escalating conflict between two of the world's biggest economies drove major risk-based markets lower. On Monday 13 May - the first trading day after China's retaliation - the markets painted an ugly picture:

  • The Dow Jones Industrial Average (DJI30) dropped more than 600 points - its worst trading session since 3 January.
  • The S&P 500 (SP500) also had its worst day since the beginning of the year falling 2.4% in just one day.

Forex markets saw major moves into the safe haven currencies of Japanese Yen, the Swiss Franc and Gold. Commodity currencies such as the Australian dollar - heavily linked to growth in China - fell to new four-month lows. So, are these moves tradable? Let's find out.

How to Trade Market Volatility

Most market participants are trend following in nature - meaning they trade in line with the trend of the market. One of the simplest forms of entry talked about in many trading books is to 'buy low and sell high'. These are called pullback, or retracement, strategies.

However, on heightened market volatility, markets can move instantly in a given direction as traders scramble to get their trades on - or exit the trades that are moving against them. While there are many ways to trade this type of increased volatility in the market, many traders favour breakout type strategies. As an example, let's take a look at a daily price chart of gold:

Trading Gold

Source: Admiral Markets MT5 Supreme Edition, Gold, Daily - Data range: from December 6, 2017, to May 13, 2019, accessed on May 13, 2019, at 10:57 pm BST. - Please note: Past performance is not a reliable indicator of future results.

In the screenshot above, the market often moves between trending periods and ranging periods. The highlighted yellow square box shows the most recent trading range of gold. As prices often move sideways in a trading range it shows that neither buyers or sellers are dominant.

However, even in a trading range, price volatility can start to exhibit some structure in buying and selling activity. For example, the hourly chart of gold paints an interesting picture:

Trading Gold

Source: Admiral Markets MT5 Supreme Edition, Gold, Hourly - Data range: from April 22, 2019, to May 13, 2019, accessed on May 13, 2019, at 11:04 pm BST. - Please note: Past performance is not a reliable indicator of future results.

In the above price chart, much of the price action in the sideways range is random. However, before gold broke to the upside, price volatility began to show structure in between the support and resistance lines shown by the ascending and descending black lines.

The move into safe-haven assets, on the back of escalating US-China trade tensions, helped gold breakout of its trading range to the upside. After the first hourly bar broke out and closed above the upper resistance line, traders could have entered a buy, or long position, on the close of the bar around $1,291, with a stop loss at the low of the bar around $1,282.

If the market fell and hit the stop loss, the trader would lose 9 points. If trading at the lowest volume, or lot value, of 0.1 this is the equivalent of losing $90. If the trader held on and closed it at the end of the day around $1,299 it would have resulted in a profit of around $80. With no US-China trade deal in sight, how are you preparing for more volatility flows?

One of the best ways you can get started is by downloading the MetaTrader 5 trading platform, where you can trade thousands of the world's financial markets using your Admiral Markets live or demo account. Simply click below to get started!

https://admiralmarkets.com.au/trading-platforms/metatrader-5

The given data provides additional information regarding all analysis, estimates, prognosis, forecasts or other similar assessments or information (hereinafter "Analysis") published on the website of Admiral Markets. Before making any investment decisions please pay close attention to the following:

  1. The analysis is published for informative purposes only and are in no way to be construed as investment advice or recommendation.
  2. Any investment decision is made by each client alone whereas Admiral Markets shall not be responsible for any loss or damage arising from any such decision, whether or not based on the Analysis.
  3. Each of the Analysis is prepared by an independent analyst (Jitan Solanki, Freelance Contributor) based on personal estimations.
  4. To ensure that the interests of the clients would be protected and objectivity of the Analysis would not be damaged Admiral Markets has established relevant internal procedures for prevention and management of conflicts of interest.
  5. Whilst every reasonable effort is taken to ensure that all sources of the Analysis are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admiral Markets does not guarantee the accuracy or completeness of any information contained within the Analysis. The presented figures refer that refer to any past performance is not a reliable indicator of future results.
  6. The contents of the Analysis should not be construed as an express or implied promise, guarantee or implication by Admiral Markets that the client shall profit from the strategies therein or that losses in connection therewith may or shall be limited.
  7. Any kind of previous or modeled performance of financial instruments indicated within the Publication should not be construed as an express or implied promise, guarantee or implication by Admiral Markets for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed.
  8. The projections included in the Analysis may be subject to additional fees, taxes or other charges, depending on the subject of the Publication. The price list applicable to the services provided by Admiral Markets is publicly available from the website of Admiral Markets.
  9. Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, you should make sure that you understand all the risks.

差价合约是复杂的产品,并且由于杠杆作用具有快速亏损的高风险。