(Bloomberg) — Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. The escalating U.S.-China trade war continues to grip the world’s financial markets leaving investors with only one certainty — currency havens are set to remain king and several more Federal Reserve rate cuts are seen as inevitable.President Donald Trump’s hammerlock on battling China any way he can as the two super powers struggle to make a deal will add fuel to the search for safety as markets reopen for business on Monday. The Japanese yen, the top-performing major currency this year, is on course to appreciate further, as is gold. Strategists are predicting further depreciation of the Chinese yuan and renewed momentum in this month’s government bond yields’ spiral.With the trade rift growing traders have lifted chances of three more Fed cuts in 2019. Chairman Jerome Powell’s warning at Jackson Hole Friday that the U.S. economy faces “significant risks” was quickly met with new threats from Trump of further action on China. While his decision to impose additional tariffs fell short of speculation for a stronger U.S. response, such as currency intervention, odds remain dim for a trade agreement anytime soon. All this makes the trading week set to start on febrile footing.“The market now expect the trade tensions to unleash an even bigger deflationary force and growth hit than it did before last week,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. “We should expect a weaker fix for the yuan versus the dollar. Haven currencies, like the yen and Swiss franc, will be in demand and those tied to growth – including the Australian, New Zealand and Canadian dollar – will be under pressure.”In the wake of a 2.6% drop in the S&P 500 Index Friday, some stocks in the Middle East on Sunday gave global investors a taste of what’s to come, with indexes in Israel and Saudi Arabia falling at least 2%. The greenback is sitting close to this year’s lows against the yen at just above 105 while the 10-year Treasury yield is at about 1.5%, on course for its biggest monthly drop in more than four years.Trump’s piling on more criticism of Powell on Friday, coupled with a call to U.S. companies operating in China to consider leaving, pummeled markets going into the weekend. This backdrop also sent a key slice of the yield curve, which is closely watched as a gauge of an impending recession, further into inversion as traders’ viewed the growth outlook as more dire and ramp up bets the Fed cuts.The gap between three-month rates and yields on 10-year Treasury notes fell to Friday to as little as -45.9 basis points – its least since March 2007.“Escalation of the trade war could extend the bond rally further, with increased probability that U.S. 10s revisit all-time yield lows set in 2016,” – at 1.318%, wrote a team of strategists at Goldman Sachs Group Inc. including Praveen Korapaty, on Sunday. “Cross-border flows into U.S. dollar fixed income, driven by a surge in negative yielding debt, may not moderate without broad improvement in data.”There is roughly $16 trillion pool of global debt with sub-zero rates. Treasuries have gained 8.4%, leaving them on track for their best annual performance since 2011, according to the Bloomberg Barclays U.S. Treasury Index.A dive in the greenback Friday also sparked renewed speculation the U.S. may intervene to weaken the currency.The Bloomberg Dollar Spot index sank 0.35% on Friday, while the euro jumped 0.6% to $1.1144 and the Japanese yen appreciated 1% to 105.39 per dollar.“Friday’s financial market blows signal the yuan will keep weakening, safe haven assets will stay in demand and the dollar will remain supported for now by limited Fed easing despite fears of FX intervention,” said Mansoor Mohi-uddin, senior macro strategist at NatWest Markets in Singapore in a note.Adding to the nervousness was a Group of Seven gathering in Biarritz, France, at which French President Emmanuel Macron appeared to anger the U.S. by seeking to put climate change at the top of the agenda. The meeting may end without a final communique.“The trade war between the U.S. and China is now escalating at a bewildering pace, which is likely to trigger further market volatility and expectations of ever more aggressive monetary easing from the Federal Reserve,” said Patrick Wacker, a fund manager for emerging-market fixed income at UOB Asset Management Ltd. in Singapore. “The yuan will keep falling towards the bottom of its new near-term range of 7.05-7.25 against the dollar.”This heightened volatility combined with overall less firepower at central banks’ disposal to combat growth risks will stoke more flight to quality that benefits U.S. investment grade assets and high-grade emerging markets, according to Wacker.Edward Bell, the director of commodity research at Dubai-based bank Emirates NBD PJSC, sees the wack of the tit-for-tat moves between the U.S. and China as likely to weigh on crude prices.Chinese refiners may actively move away from taking U.S. crude as the additional tariffs eat into margins, and also as a trade tactic encouraged by the Chinese government, Bell said. That excess will need to be offered elsewhere and likely will need to be done so at a discount.On Sunday, possible signs that Trump may be regretting being aggressive on China at the G-7 gathering soon abated when the White House said media misinterpreted his initial remarks. That confusion will only add more uncertainty to the outlook, some analysts predicted.White House Press Secretary Stephanie Grisham said that Trump doesn’t regret starting a trade war but he does have second thoughts on whether he should have hit the Chinese even harder.Trump’s comment followed by the reversal only “adds more uncertainty to markets, which increases the odds of a U.S. recession,” said Andrew Brenner, the head of international fixed-income at Natalliance Securities in New York.To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Filipe Pacheco in Dubai at fpacheco4@bloomberg.net;Liz Capo McCormick in New York at emccormick7@bloomberg.netTo contact the editors responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net;Dana El Baltaji at delbaltaji@bloomberg.net;Jenny Paris at jparis20@bloomberg.netFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

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