US Secretary of Commerce confirms the imposition of customs duties (Afternoon analysis 3.12.2019)

Strong deterioration of market sentiment with a limited impact on the dollar. Wilbur Ross, in an interview on CNBC, confirms the introduction of customs duties on Chinese imports on December 15th, if no agreement is reached. The zloty remains stable and fluctuates only slightly, but the EUR/PLN exchange rate falls below 4.28 PLN.

Market's attention focuses on geopolitical events

Tuesday's session was marked by worse sentiment. This was due to a renewed fear of international trade, which opened up on several fronts. The market is not only affected by the customs war between the US and China, but also by the customs duties imposed by the US on imports of steel from Argentina and Brazil and the risk of tariffs on imports of French luxury goods worth about 2.4 billion USD, which could be imposed by the US already in the first months of 2020.

The NATO summit in London began today, and in the afternoon, US President Donald Trump held a press conference with French President Emanuele Macron. Trump has somewhat softened the tone of the previous statements on customs duties on imports of goods from France, emphasising that he has good relations with France and that both countries currently have only minor problems in terms of customs duties. However, this did not help the market, where we saw a strong increase in risk aversion during Tuesday's trade.

The main US market indexes lost more than 1% each, and their European counterparts were also under considerable sales pressure. Assets perceived as safe havens, including the yen, the franc and gold, continued to appreciate.

Today, gold has exceeded 1,480 USD per ounce, rising to its highest level in nearly a month. This highlights the rapidly growing market concerns about restrictions on international trade, which, as the current downturn, especially in the industrial sector, can quickly have a negative impact on the economy.

In less than an hour after the opening of the New York Stock Exchange session, the US Secretary of Commerce Wilbur Ross said on CNBC that if the agreement with China is not concluded by December 15th, then additional duties will be imposed on imports from China. Ross also brought up the issue of Hong Kong, which in his opinion "has become a new variable in the US's trade talks with China" and complicates the negotiations a bit. However, this may be perceived relatively negatively by the market due to somewhat confrontational statement that "the US has more weapons left against China" [in the case of customs war] and "China ran out of bullets." He stressed, however, that a breakthrough could take place. However, this is not an optimistic statement. It may suggest that there is little evidence that the first phase of an agreement will be reached before December 15th.

The currency market reacted calmly as if it was already immune to significant changes regarding international trade. Traditionally, in times of increased uncertainty and risk aversion, the franc and the yen were appreciating, but these changes in the afternoon did not exceed approx. 0.5% compared to Monday's closing levels. The US currency quotations, on the other hand, remained stable, the EUR/USD exchange rate was locked in a narrow range of approx. 1.1066-1.1088 one hour after the beginning of the trading session in the USA. Minor changes in the dollar's valuation and the maintenance of its relative weakness continue to support the zloty, even though negative sentiment persists on the broader market. In the afternoon, the EUR/PLN exchange rate fell below 4.28, the lowest level in three weeks. Theoretically, a significant deepening of sentiment on the stock market in the following hours could ultimately have a negative impact on the zloty's basket. However, to make the potential weakening stronger, the dollar would have to appreciate again. In the current atmosphere, however, it is not expected that the US currency will be subject to strong demand pressure, hence the base scenario for the zloty is to stabilise around current levels later in the day.

Tomorrow's preview

At 10:00 a.m., the rest of the final PMI data from the eurozone for November will be known. This will be the next reading of the service sector indexes; therefore, changes are not expected. However, yesterday's final data from the industrial sector came as a positive surprise, so it is possible that a similar revision upward awaits the data from the service index. Given the lack of response to yesterday's better than expected figures, which were hidden behind concerns about international trade, we can expect a similar scenario tomorrow as well.

At 2:15 p.m., ADP will present data on changes in employment in the non-farm sector in the USA in November. The data can provide an indication of what will appear in the official reading from the Department of Labor, which will be announced on Friday. The median of market expectations indicates an increase in employment by 140k. Tomorrow will also receive information from the USA about the ISM index of the services sector. The industrial sector index presented by ISM yesterday failed the market expectations, indicating a decrease in activity in the sector again. The market consensus for the services sector assumes a slight decline (by 0.2 pts.) to 54.5 pts. Yesterday's lower than expected ISM reading of the industry weakened the dollar. If the index for the services sector also fails, the supply pressure on the US currency may increase.