Market muted despite new US tariffs in place

Summary:

• Donald Trump announces duties on Chinese goods worth $200 billion

• RBA’s minutes came without a surprise, Antipodean currencies gain momentum

• NASDAQ (US100) loses over 1.4% marking its worst session since 27 July

The Trump administration decided to announce additional tariffs on China worth as much as $200 billion further escalating the trade war with Beijing. The tariff rate will be 10% and will be applied to almost 6000 various items. It is worth underlining that unlike the previous levies this round of duties is expected to hurt consumers the most therefore they could experience higher prices in the last quarter of the year. The US added that new tariffs will take effect from 24 September and the above-mentioned rate of 10% will increase to 25% from the beginning of 2019 unless the two countries strike a deal. The United States also signalled that tariffs on further $267 billion imported Chinese goods are in the pipeline should the world’s second largest economy retaliate. Assuming that the US President does so, it would mean that virtually all goods imported from China would be subject to duties. According to a South China Morning Post report the Asian country’s plans to send Vice-President Liu He to Washington for talks are being reviewed after Trump announced decided to push ahead with trade restrictions. Let us remind that the US, by implementing new tariffs, is striving to combat “unfair” trade policies China holds with the world’s largest economy - this is Trump’s rhetoric. In theory levies are aimed at directing the domestic demand to local businesses instead of foreign goods which after tariffs become relatively more expensive.

From a technical viewpoint the NASDAQ has taken a step back and corrected toward the lower bound of the channel. This means that today’s session could be remarkably important for investors having exposure there. A possible breakdown of this support would result in a pullback toward 7200 points. Source: xStation5

A financial markets’ response has been benign so far as new tariffs were broadly anticipated but it could change once China chooses to retaliate, it would be a clear-cut sign that none of the country wants to terminate the trade spat. In the morning the US dollar is trading pretty flat while the US 10Y yield is moving marginally below 3%. Do also notice that Chinese equities have been remarkably resilient to these adverse revelations defying a 1.4% drop seen in the NASDAQ (US100) on Monday. In case of the US index we had the so-called FAANG stocks among top losers dragging the entire index down. Netflix declined 3.9%, Apple fell 2.7%, Facebook dropped 1.1% and Alphabet went down 1.4%. In turn, a 3.2% drop in Amazon came after the WSJ reported that the e-commerce company was investigating internal leaks to root out fake reviews and other seller scams.

Setting aside the trade war thread it is also worth mentioning the minutes from the Reserve Bank of Australia. The central bank had discussions regarding trade strains signalling that significant global trade tensions were a “material risk” to the outlook. On top of that the unemployment rate is still expected to move down gradually toward 5% and wage growth is forecast to increase in a gradual manner along with spare capacity in the labour market being absorbed. The monetary authority added that GDP would likely keep running above its potential through the forecast period and inflation would increase over time. While the minutes reiterated that there was “no strong case” for a rate hike in the near-term, they also reaffirmed the next move was likely to be up. When it comes to the exchange rate the central bank suggested that the recent modest fall was helpful for the domestic economy. The bank also referred to recent mortgage rate increases made by some Australian banks saying that they would likely unwind “about half of the decline observed in the average housing loan rate over the preceding year”. The Australian dollar is leading the gains this morning along with the NZ dollar sending a signal to markets that at least FX investors are not particularly concerned about the new round of US tariffs.

The Aussie dollar has bounced off its local support area and it could continue marching higher if a risk-on mode gathers does not turn out to be short-lived. The target for bulls might be determined at 0.7310. Note that Antipodean currencies have been hit hard over the recent weeks having sizeable space to recoup their losses. Source: xStation5

In the other news:

• China could slash the RRR around October according to the China Securities Journal

• Japanese NIKKEI (JAP225) gained 1.5% during the first trading day this week after the holiday on Monday