China Wakes, Markets Wilt

China hit back on US tariffs Monday in a sign of a change in tactics in the trade war that has deep consequences. The Swiss franc is the top performer to start the week while the NZ lags. Kiwi underperformance puts the Premium Insights' long EURNZD trade in +570 pts in the green. The are three Premium trades currently open (all in the green) and new trades will be issued in the next 24 hours. CFTC positioning shows that risk-off trades could have some room to run. Here is a summary of the situation from Ashraf's tweets:

Click To Enlarge

Until now, China had been angling towards a strategy of appeasement and slow-rolling the US on the trade war. That may have changed after Trump shocked the world last week by announcing a fresh round of tariffs to take effect Sept 1.

China allowed the yuan to weaken below the key 7.00 mark on Monday in the onshore and offshore market. Reports of cancelled agricultural purchases also roiled markets.

The result was dramatic. USDX posted its biggest decline since June 4th,  US 10-year yields fell 10 basis points to 1.75% and the German bund fell to -0.52%. The S&P 500 fell 2.98%, the biggest daily drop since December 4th and the German DAX broke the 200-day moving average. Gold has exploded to a fresh cycle high, hitting $1469.

The shift in Chinese strategy to confrontation is a game-changer and it brings to mind the August 2015 drop in the yuan that sparked a wave of risk aversion. We're now in a situation where both sides are trying to hurt one another and it won't turn around until one side hits a breaking point.

CFTC Commitments of Traders

EUR -53K vs -39K prior GBP -90K vs -79K prior JPY -4K vs -9K prior CHF -14K vs -13K prior CAD +21K vs +31K prior AUD -53K vs -48K prior NZD -12K vs -12K prior

The net short in the pound climbed to the most-extreme since 2017 on Brexit worries. The ones that jump out with a trade war looming are the relatively neutral positioning in the yen and franc.