The US stock markets ended trading Wednesday with a sharp decline amid reports that the 10- and 2-year-old bond yields curve had entered negative territory for the first time since 2007. This could be considered an official inclusion of a counter, counting the days prior to the recession. Markets instantly forget that July inflation soared more than forecasts, indicating that consumer demand is still growing steadily. Meanwhile, import and export prices rose by 0.2% in July with zero growth forecasts, which also indicates positive developments.

The inversion of the yield curve is only one of the drivers of market decline, but the second came from China. The growth of industrial production in July by 4.8% is the worst result for 17 years. Also, the growth of retail sales was weaker than forecasts by 7.6% against 9.8% a month earlier.

First of all, if the data from the US provoke the reaction of financial instruments as investors are guided by certain trends in asset yields and risk levels, China in recent years has acquired the status of a driver for Asian and commodity markets. The stability of the Chinese economy indicates the stability of the raw materials market and global production, as well as the slowdown that signals the beginning of a period of business recession. A characteristic feature in the recent months is a slowdown of iron ore imports to 1.2% y/y and a decrease in copper imports by 7.1% y/y, which indicates a slowdown in the production of technological goods.

The growing trade deficit in the United States and China is breaking records. The trend has no signs of change, despite Trump's desperate attempts. This means that escalation is inevitable, and the US withdrawal from the WTO may not be the last step in the battle for world leadership.

Under the current conditions, hoping to wait for the resumption of economic activity are becoming more and more illusory. The growth trend in the demand for protective assets is developing. Therefore, the growth of gold and demand for bonds looks natural and logical. Only dollar strengthening can prevent the growth of gold due to the withdrawal of the liquidity part of the US Treasury to restore a single treasury account (GCA).

In the coming days, we should expect the development of negative processes in the global economy. The demand for gold and bonds will be steady and safe-haven currencies such as the yen and franc will be in high demand. Oil and commodity currencies are under pressure.

USD/CAD pair

Against the background of the lack of macroeconomic news, the Canadian dollar managed to stay below the maximum of the month trade at 1.3345. Despite the growth of panic, it is mainly in the lateral range. Part of the reason is a partial recovery of oil prices from the lows of August 8 but the main reason is still the low probability of a rate cut by the Bank of Canada since inflation exceeds the target level of 2%. The average wage growth in July was 4.5% YoY, which allows counting on steady consumer demand.

The Loonie has no direction and trading in the range is the most likely scenario. If a new wave of panic covers the markets, then a breakdown of resistance of 1.3345 and growth to 1.3420/35 are likely. Otherwise, slow drift to the channel boundary of 1.3230/35 is likely.

USD/JPY pair

The yen maintains an advantage against the dollar. Primarily, it is due to demand as a protective currency, and secondly due to unexpectedly strong data on industrial production in June, which will support exporters. Orders for engineering products increased by 13.9% YoY, which is the maximum for 4 years. The preliminary data on GDP growth rates of in Q2 were significantly better than forecasts with a growth of +1.8% and expectations of +0.4%, which signals no threat of a recession.

The yen is trading in a wide range of 105 and 107, and the Bank of Japan will defend support 105, possibly even through interventions. However, if the external environment worsens and markets become more convinced of an imminent recession, the yen will continue to strengthen.