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Trade war turmoil sends markets reeling

The lull in the U.S.-China trade war didn’t last long, and the conflict’s escalation meant turmoil for traders and investors Wednesday. Here are some of the things people in markets are talking about.

Stocks Slump, Commodities Plunge, Dollar Rallies

U.S. stocks fell, crude plunged the most in two years and the dollar gained as markets reeled from fresh salvos in the escalating trade war between the U.S. and China. The S&P 500 Index ended the longest rally in a month after the Trump administration said it will slap tariffs on an additional $200 billion of Chinese products. The Asian nation vowed to retaliate. Metals and oil bore the brunt of the reaction in commodities: Copper, nickel and zinc all tumbled amid fear that increasing protectionism will hurt global raw-material demand. Trade-sensitive shares in the U.S. led declines, with Caterpillar Inc. and Boeing Co. slumping along with Freeport-McMoRan Inc. and Deere & Co. Emerging-market equities fell more than 1 percent to halt a three-day climb. The offshore yuansank the most since August 2015 on a closing basis. Asia stocks are set for a muted start to trading Thursday.

Trade Talks Going Nowhere Fast

High-level trade talks between the U.S. and China have ground to a halt as the Trump administration threatens to escalate a trade war that shows little sign of abating, according to five people familiar with the matter. The countries held three rounds of formal negotiations since May, led by U.S. Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross and Vice Premier Liu He in China. But communications between senior members of the Trump and Xi administrations have petered out, and there’s no immediate plan to restart the formal talks, said the people, who spoke on condition of anonymity because the deliberations aren’t public. The diplomatic impasse makes it unlikely the two countries will stand down anytime soon from an intensifying trade war that’s threatening the broadest global upswing in years.

Tariffs Blunt FX Volatility

Foreign-exchange traders are struggling to know which way to lean when it comes to betting on the escalating global trade war. Even amid the heated rhetoric, swings in major developed-market currencies have remained muted, and opinion is divided about what might constitute a haven if tensions escalate. Measures of realized volatility are close to the lows for the year. The situation has upended some assumptions about how certain currencies move in times of risk aversion, leaving strategists flummoxed. Standard Bank said Wednesday it’s disinclined to make new forecasts given the murky outlook, while Societe Generale SA said it’s struggling to figure out why the yen isn’t acting as a haven. Commerzbank AG said it was stumped about where the dollar is headed from here.

Trump, Merkel Face Off at NATO

Angela Merkel responded to Donald Trump’s pre-NATO tirade, as the two face-off at the opening of the organization’s two-day summit. On her arrival, Merkel said Germany was doing its bit for NATO and went on to stress Germany’s right to make decisions in its own interests. “I would like to add on this particular occasion that I myself have experienced Soviet control over part of Germany,” Merkel said. “I’m very happy that we in the Federal Republic of Germany live united in freedom, and for that reason we can make sovereign decisions.” Her comments came after Trump blasted Germany’s Nord Stream 2 pipeline deal with Russia. Few expected smooth sailing at the Brussels summit. But the vehemence of Trump’s on-camera breakfast attack on Germany for its backing of the gas project, and for being “captive” to Russia, came as a shock.

Coming Up…

The Bank of Korea’s meeting concludes Thursday, with economists expecting officials to hold their key rate at 1.5 percent as policy makers weigh signs of renewed softness in the economy and the potential fallout from escalating trade friction between the U.S. and China. A stalling of export growth and the prospect of growing trade protectionism combined with heightened concern over unemployment have dampened earlier market expectations for a possible policy tightening as soon as this month. India releases CPI and industrial production, and U.S. will release inflation figures Thursday morning local time.

What we’ve been reading

This is what caught our eye over the last 24 hours.

And finally, here’s what David’s interested in this morning

Given how rapidly things are evolving on the trade front, I’ll keep this short and simple. In keeping with the spirit of lists (lists of products exposed to tariffs, lists of retaliatory measures, lists of reasons to be bearish), here are two from me. These are the 10 largest listed companies in China that derive the bulk of revenue from their home markets:

And here’s the equivalent set of U.S. companies:

One popular investment strategy that’s emerged recently is simply to buy companies that don’t really need to sell overseas. It’s almost a natural hedge against rising protectionism while remaining invested. It’s also a potential play, if you think some of these declines are excessive. However, while there’s little exposure on the sales side, certain parts of the supply chain might be less protected so don’t completely rule out cost disruptions. And just to be very clear, I’m in no way offering investment advice! Based on the conversations I’ve had with our Bloomberg Television guests, these types of lists seem to be garnering more and more attention. Terminal clients can reproduce these on EQS <GO>. Or get in touch, and I’ll send them over.

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