Markets go into the red zone again. Will the yen take a chance?

Panic sales are again on the agenda. If the decline in the US stock indices is still insignificant, the S&P 500 declined on Wednesday by 0.28%. Consequently, Asian sites are falling much more pronounced. The Nikkei is losing by 0.7%, the Shanghai Composite by more than 1%, the July futures for Brent have come close to $70 per barrel and Europe has also opened with a decline.

The reason is the further escalation of the trade war, which is on the verge of going global. Japan and the UK have joined the Huawei boycott, and the US is planning to expand the list with another 5 companies from the Chinese technology sector.

Markets prefer not to notice a change in the direction of cash flows, but these changes are quite significant. From the monthly reports of the US Treasury, it follows that foreign investors are withdrawing from the US stock market and from US Treasures, preferring either corporate bonds or withdrawal to other markets. Russia has long reduced its investment in US T-bills to a minimum, but this step is largely due to political, not economic motives. At the same time, the two largest buyers of American debt, Japan and China, are also gradually reducing their investments in treasures but this process is still poorly pronounced.

By the end of 2018, the balance of the National Bank of China were US bonds in the amount of 1.12 trillion dollars or 28% of the total foreign debt holders. China has always stated that investing in the US national debt is necessary to prevent excessive weakening of the yuan. However, if the trade war develops, and the matter goes, then China is fully capable of making a decision on additional easing. In this case, they no longer need to hold significant reserves in treasures.

Japan has a little less than 1.03 trillion or 25.7% in December 2018. In analyzing the cash flows of Japanese investors, Bank Mizuho notes that investments in US government securities grew steadily until Trump was elected as president. But from 2016 onwards, there is a reverse process as Japanese investors are actively looking for alternative allocation of their capital.

Of course, the threat of a sovereign default by the United States is still beyond the possible scenarios but serious measures are needed to prevent it. Some of them are taking the administration of Trump ultimately because the trade war should contribute to the growth of profits of American corporations and control of sales markets, which forms the revenue side of the budget.

However, in the event of a further escalation of trade wars, the purchase of US government debt will be increasingly an internal affair of the United States. This is a very dangerous trend since it will contribute to the de-dollarization of the world economy, and therefore, the United States should not allow developments in this direction since the threat of default in this case from the hypothetical will become obvious.

The threat of rising panic leads to an increase in demand for defensive assets, which include the Japanese yen. Preliminary GDP data for Q1 turned out to be noticeably better than forecasts, in March, orders for machine-building products increased and in many respects, the success of the Japanese economy was a consequence of the trade war. Japan takes advantage of the moment amid a deterioration in the position of Chinese exporters.

At the same time, the industrial PMI in the manufacturing sector in May at the level of 49.6p, which is slightly worse than the April 50.2p, while the negative trend is also at production prices.

The latter factor is negative for GDP as it indicates a decrease in inflationary pressure, but positive from the perspective of the yen.

Tensions will increase by the end of the week. China has already sharply criticized the decision of the United States to increase pressure on the Chinese technological factor. Any response from China could provoke a collapse in stock markets and a fall in commodity prices, leading to a fall in commodity currencies and an increase in demand for bonds, gold, and the yen.

The maximum of USDJPY of May 21 at the level of 110.67 will stand in the coming days. It is more logical to use growth attempts for sales. The immediate goal is to go below the support of 110.10/15 ad the second goal is 109.80 with the prospect of a move to 109.00.