Trump spoils upbeat moods announcing new levies on China

Summary:

• Donald Trump administration plans to slap China with a package of new duties worth $200 billion
• Asian indices plunge in the aftermath, commodities take a dive as well
• Australian dollar is hit hard, US yields move somewhat lower

Following two upbeat days across riskier assets a brutal end of this idyll came and roiled markets noticeably. The Donald Trump administration informed yesterday it planned to push ahead with fresh tariffs on Chinese goods worth $200 billion being burdened with a 10% rate. Even as a list of products has yet to be released (there were just mentions about clothing or TV components) there is a clear signal of a further escalation of the trade spat between the world’s two largest economies. According to a statement from the US Trade Representative’s office the new levies could come into effect after public consultations which are expected to be ended on 30 August, so one may expect fresh levies should be implemented within two months. Recall, Donald Trump announced $34 billion tariffs on China’s products on last Friday suggesting that further $16 billion levies would be unveiled within two weeks. After several hours China retaliated announcing the same-scale blow to the United States and vowing to stick to a tit-for-tat approach.

Among states the most afflicted by tariffs are those being strongly supportive of the incumbent president. Source: The Telegraph

Notice that tariffs promised by the Trump administration put another burden on US consumers as affected companies may have an incentive to lift prices in the domestic market. This is not the best thing Trump would like to get ahead of elections being mostly held in November this year. As you can see at the map above one may spot that among states being the most afflicted by levies (Nebraska, Florida, South Dakota or Iowa) are those which voted for Trump in the presidential election in 2016. Thus, should they feel worse-off, they would express their dissatisfaction via voting against the Republican Party.

Chinese stocks plunged following a further trade war escalation. Source: xStation5

We pointed out earlier this week that a bounce to the upside was remarkably fragile, and it actually was. The Chinese Hang Seng (CHNComp) respected yesterday a local resistance line at a 23.6% retracement beginning today’s session well below this level. The index is currently trading 1.9% lower. Therefore, we keep our view that until trade tensions settle down, riskier assets including especially Chinese equities should remain under selling pressure. Looking elsewhere, the Shanghai Composite is falling over 2%, the NIKKEI is shedding 1% while the Australian benchmark is dropping 0.75%.

Commodities have been hit hard as well, and this is particularly seen in copper being down over 3.2% this morning as investors worry that new tariffs could derail global economic growth. Grains are also substantially down with soybean losing over 1.5%. As far as currencies are concerned, one may spot that the Australian dollar is declining as much as 0.7% as it’s the most connected with the Chinese economy. To be honest, all major currencies are down (more or less) against the US dollar as risk-off has gotten back anew. In effect, the yield on US 10Y Treasuries moved down this morning by a few basis points to around 2.83% mirroring a capital inflow toward the US debt market.

The AUDJPY, being a proxy of a prevailing risk appetite, is trading notably lower for the second day in a row. Source: xStation5