As trade tensions between the US and China increased following US President Donald Trump’s additional tariffs on Chinese imports and China side announcing possible retaliation, gold prices hit 6-year high on Monday. Moreover, Bloomberg reported Chinese government asked state-owned enterprises to suspend agricultural product imports from the US and wait for developments in trade talks. In the meantime, Dollar/Yuan exchange rate passed 7 for the first time in 11 years which signalled sides might be considering currency leverage in trade war. According to data released today, in China, where manufacturing slightly recovered in July, services sector showed the worst performance in five months while in Eurozone, where manufacturing contracted further in July, services sector continued its expansion however weak manufacturing weighed on services sector.
Gold prices increased up to $1,465 an ounce and hit 6-year high on Monday by finding support from additional tariffs on Chinese goods while dollar index fell below 98.
As of 17:08 GMT+3, spot gold was trading at $1,465.90 an ounce while dollar index was down at 97.61. US 10-year Treasury yield was also down to 1.76.
CMC Markets chief market strategist Michael McCarthy said on Reuters that gold was supported by global growth worries and safe haven demand increased as central banks maintained their accommodative stance. He also added there was high possibility for further escalation in trade tensions between the US and China.
US President Donald Trump accused China of reneging from its commitments to buy more US agricultural products and announced he would impose 10% tariff on Chinese goods worth $300 billion as of September 1 while China side stated earlier that it would take necessary counter measures. Bloomberg reported Chinese government asked state-owned enterprises to suspend buying US agricultural products and wait for developments in trade talks with the US. There is no statement from China Commerce Department so far regarding the claim.
Moreover, Dollar/Yuan exchange rate passed 7 for the first time in 11 years as China’s central bank stated it would keep the currency stable. Devaluation in yuan is not expected to be economically significant for now but there is high risk that it will cause further escalation in trade tensions since the US has been complaining about the claim of China weakening its currency systematically to have advantage in trade. Chinese yuan has been weakening since February which helped Chinese exporters burdening additional tariffs imposed by the US while there is a risk that weakening yuan may hurt already slowing Chinese growth and lead investment outflow. Currently, Chinese central bank sets the exchange rate daily and lets 2% float to be decided by market forces.
In China, where manufacturing contracted despite slight recovery in July, services sector showed the worst performance since February in July as services PMI decreased to 51.6 from 52. Caixin stated the economy showed recovery in July due to fiscal and monetary stimulus while composite index increased to 50.9 from 50.6, which signalled services sector compensated weakness in manufacturing sector however weak market conditions are expected to weigh on demand and cause further deterioration in Chinese economy.
In Eurozone, where recent data showed further contraction in manufacturing in July, services PMI declined to 53.2 from 53.6. Besides, composite PMI as a better indicator declined to 51.5 from 52.2 while expansion in services sector continued to support Eurozone economy however weak manufacturing weighed on services sector. No recovery is expected in the short term while bloc’s economy is expected to show weak growth performance in the Q3 due to trade tensions, global economic slowdown and Brexit uncertainty.
In the US, where manufacturing weakened but continued to remain in expansion area in July, ISM services PMI decreased to 53.7 from 55.1 in the same month, the lowest level since August 2016. Despite weakness in Asia and Europe, US economy continues to stay in expansion area and perform better comparing to other parts of the world amid slowing global economy and trade war.