US Escalates Trade Tensions Ahead of Trump-Xi Meeting

The US stepped up pressure on China, launching a new round of Section 301 investigations into 60 trade partners as markets fret over the fallout of the Iran war that has put renewed pressure on the Far East.

The Latest Developments

• High-level trade representatives from the US and China meet in hopes of clearing a path for a major announcement when Trump and Xi meet.
• The war amid shifting trade relations could pose a challenge for markets, as China is a major importer of crude oil from the Persian Gulf.
• US markets have remained resilient amid the uncertainty, with the benchmark S&P 500 off only 5% from the most recent record high.

US Ramps Up Negotiation Pressure

On Thursday, the US Trade Representative announced it had launched new Section 301 trade investigations into 60 economies to determine whether they had failed to curb goods made with forced labour. This follows the launch of a probe into 16 trade partners for unfair practices on Wednesday. The latest salvo in the trade war targets the largest US trading partners and is seen as intending to put pressure on China, which Washington often accuses of using forced labour. The announcement comes just before "groundwork" talks between the US and China ahead of a pivotal meeting between US President Donald Trump and Chinese President Xi Jinping in Beijing at the end of the month. There is widespread speculation that the presidents' meeting would be the occasion to announce a major de-escalation of the trade war between the world's two largest economies, which has roiled markets. US indices, including the S&P 500, fell to yearly lows on Friday after the trade measures were announced.

The negotiations between the US and China take place amid the war in the Middle East, as China is the world's largest importer of oil from the Persian Gulf. Earlier, China had sought to leverage its stranglehold on rare earths during trade negotiations. But with the Strait of Hormuz closed and the US taking control of oil exports from Venezuela, Washington has counterleverage in energy. Similar to last year, when trade tensions rose ahead of a Trump-Xi meeting on the sidelines of APEC in South Korea, frictions between the two nations could escalate and even affect the war in the Middle East. Iran on Saturday offered to allow oil shipments through the Strait if paid in yuan, while Trump called on China to send warships to open the Strait for oil shipments. Reportedly, Beijing was privately urging Tehran not to block oil shipments.

US-China Trade Chiefs Meeting

US Treasury Secretary Scott Bessent and Chinese Vice Premier Li Lifeng met on Sunday and again today, Monday, in Paris to clear a path for the presidential meeting. However, analysts are sceptical that there will be any major advances, given the little time to prepare and the distraction posed by the US war in Iran. Rather, both sides will likely be satisfied with maintaining the fragile trade truce while manoeuvring for leverage, with Trump suggesting a delay in the presidential meeting if China doesn't help with Iran. While US equities have declined compared to the start of the war, traders have yet to price in a market panic. The S&P 500 is off only 5% from its all-time high, meaning it's far from a correction. Oil is still far from the peak seen in the aftermath of the Russian invasion of Ukraine, with traders hopeful for a quick rebound if the war in the Middle East is resolved quickly, followed by a positive Trump-Xi meeting in a couple of weeks.

SPX500 in Head and Shoulders Patterns

The US index might be heading towards the neckline support of a potential complex head-and-shoulders pattern, with the right shoulder expected at 6950 and multiple heads having put in peaks with a top at 7030. If 6600 fails to hold bearish price action, the support at 6520 might do. However, for the pattern to play out, any bounce would be short-lived, with a breakdown opening the door to much lower levels. First support lies at the round 6500, followed by 6250 and the measured-move projection at 6k. On the flip side, this could all be a correction, with 6750 playing a critical role in the short to medium term (as a potential neckline of a smaller H&S pattern). Breaking the resistance would expose 6850 and the 7k handle, paving the way for new records.

Source: SpreadEx | SPX 500, Daily Chart