Markets rattled as Trump hits China with new tariffs

Summary:

• US President Donald Trump has announced to impose a 10% tariff rate on remaining $300 billion of Chinese goods
• He has added he could raise them in stages even to above 25%, he is expected to give a speech regarding EU trade later Friday
• Markets have been rattled with the yen soaring, US Treasury yields tumbling and stocks declining alike

New tariffs in play

On Thursday, US President Donald Trump decided to hit China with a fresh round of duties on the remaining $300 billion of imported goods. A “small” (as Trump wrote in his tweet) rate of 10% will come into effect on September 1. On top of that, he added the new rate will not include $250 billion of good being already levied at a rate of 25%. In terms of the backdrop of this announcement Donald Trump tweeted that talks held in Beijing between Chinese and US negotiators earlier this week were constructive. He also added that “We thought we had a deal with China three months ago, but sadly, China decided to re-negotiate the deal prior to signing.” - that could be a reason in the eyes of Trump to put a so-called insurance tariff rate (the same was done by Fed’s Jerome Powell who was afraid of a further trade war escalation). Trump explicitly stressed that China had promised to buy more agricultural products from the United States but then it reneged on this handshake agreement. Moreover, Donald Trump also underlined that this 10% rate could be raised in stages and this level applies only to a short period. Furthermore, we have been offered some headlines this morning that Donald Trump will give a speech with regard to EU trade later on Friday. However, his speech is expected to concern a beef deal struck between the two sides. Nevertheless, you never know what Trump will want to do this time around, hence a cautious approach in trading is warranted. 

Markets respond decisively 

The first response to Trump's announcement looked as if somebody switched off a risk button - stocks plunged, oil plummeted, gold and yen spiked and US Treasury yields went down. Let us also notice that the USDCNH exchange rate shot up to above 6.96, reaching its highest level this year. Moreover, given the fact that this exchange rate has yet to correct one may assume that Beijing has refrained from FX interventions aimed at strengthening its currency. Thus, it may also be unwilling to defend the 7 per dollar level at any cost. Do notice that the weaker yuan offsets to some extent higher tariffs slapped by the US making Chinese goods cheaper for foreign buyers. In terms of the 10% tariff rate announced yesterday one important point needs to be noticed. Namely, this rate will apply mostly to consumer goods including apparel, cellphones, laptops, toys, storage devices and so on. Hence, it would be particularly harmful for consumers unless importing companies decide to take the additional tariffs on their chin by reducing margins. In turn, consumer spending was a key driver of economic growth in the second quarter, therefore once consumers dial back their spending it could slow the US economy. This looks like the Trump’s decision could be self-defeating let alone that tariffs are negative for the economy in the long-term.

The US 10Y bond price is set to experience a massive gains this week with the first more notable obstacle placed at around $131.8. Source: xStation5

In the other news:

• Australian retail sales rose 0.4% MoM in June, the consensus had called for a 0.3% MoM increase

• Japan has decided to remove South Korea from its white list of its trusted export countries