Chinese PMIs beat expectations, Trump ready to back tariffs on China

Summary:

• Chinese PMIs recover in August as measures taken by the govt outweighed tariff risks

• Donald Trump wants to move ahead with duties on $200 billion Chinese goods as soon as next week

• Trump rejects a EU proposal to scrap levies on cars

• USD slightly lower, Chinese stocks mixed, EM FX catch breath

In August both manufacturing and non-manufacturing PMIs from China managed to recover beating market expectations at the same time. In defiance of concerns with regard to the US tariffs’ impact on Chinese companies manufacturing PMI increased to 51.3 from 51.2 in July exceeding the Bloomberg consensus of 51. The decent beat was also seen in case of non-manufacturing index which covers both services and construction as it picked up to 54.2 this month from 54 in the prior month. As a consequence, the composite gauge jumped to 53.8 from 53.6 receding odds regarding any impact from tariffs on China-based factories. Why didn’t these indicators deteriorate this month?

Small, medium and large companies have seen convergence of PMIs of late. Source: Bloomberg

The most easiest way to justify such a development seems to be the pro-growth measures (tax cuts, proactive fiscal policy as well improved credit access for smaller firms) undertaken by the government in order to stabilize sentiment being affected by trade restrictions imposed by the United States. Thus, it appears that these steps have so far defied adverse effects resulting from duties. However, given the fact that further tariffs seem to already be in the pipeline, a deterioration of business confidence could occur in the months to come unless the government pursues its highly pro-growth policy. Note that over the past few month we saw convergence of PMIs for small, medium and large companies with the two first showing an improvement in sentiment.

The US dollar is slightly lower this morning following the yesterday's gains made in the aftermath of a further escalation of trade wars. Increased demand for the greenback came after some reports saying that Donald Trump wants to move ahead with a plan to slap China with $200 billion tariffs as soon as next week. Note that until 6 September these tariffs are being analyzed publicly, and this is actually the date until when companies and members of the public could submit comments on the proposed levies. Therefore, once the deadline passes Trump will be equipped with the legal option to impose them on the Chinese economy. Should the US decide to do so, China is expected to respond with duties on $60 billion of goods imported from the US. The further trade war escalation seems to be unequivocally stocks negative, and the US dollar positive (on the back of a safe haven flight) which could also see US bond yields marching lower in the weeks to come. In the morning Chinese and Australian equities are slightly down nevertheless EM currencies are subtly recovering at the same time following carnage seen on Thursday.

The US dollar is being delicately poised this morning but looking at the entire week it has not performed well at all losing to the shared currency the third week in a row. The weekly time frame unveils that bulls will have to deal with 1.1750 if they want to continue their rally. Either way, note that a thread pertaining to tariffs seems to be the major downside risk for the EURSUD and the upside risk for the US dollar in general. Source: xStation5

Writing about tariffs one cannot miss Trump’s remarks with respect to a proposal of scrapping all duties on cars put forward by the European Union yesterday. Despite conciliatory attempts flowing from the EU Donald Trump stood pat rejecting the EU offer likening the bloc’s trade policies to those of China. He said that “the European Union is almost as bad as China, just smaller”. Currently passenger cars being imported by the US from Europea are embraced a 10% tariff rate. On the other hand, levies on light trucks are as high as 25% - the most profitable segment for the US auto industry. To sum up, it looks that despite upbeat moods during the Trump-Juncker meeting several weeks ago nothing has changed and Trump intends to continue his work to ‘make America great again’ risking a further deterioration of sentiment across financial markets.