China spoils better market sentiment

Summary:

• China signals a lack of interest in resuming trade negotiations with the US if the latter wants to talk only under a threat of higher tariffs
• Equity markets in China move back once again as risk sentiment turns sour
• The US terminates a Turkey’s preferential trade agreement and reduced a tariff rate on imported steel

China doesn’t want to resume talks

A US-China trade dispute remains the prime topic in financial markets and it was again seen in recent hours when a commentary from Beijing spoilt recently improved market sentiment. China said openly a lack of interest in resuming trade negotiations with the United States as the latter wanted to talk only under a threat of yet higher tariffs if something went wrong. This news persuaded investors to quit riskier assets and as a result Chinese equities are down on Friday despite decent gains seen on Wall Street yesterday. It shows that Beijing is no longer interested in a tit-for-tat approach as this tactic has proved counterproductive. Having in mind that Steven Mnuchin has recently suggested that the US administration has no plans to go to China any time soon, one may suppose that a full-blown effect on Chinese imported goods will be visible in 2-3 weeks and thereby US consumers may be harmed.

More stimulus on the horizon

On the other hand, the Chinese government said that new stimulus would be stepped up to buttress the domestic economy. This is not a surprise for us as we have already pointed to such a possibility following a set of disappointing data for April (retail sales, industrial production and investments in fixed assets all came in well above expectations). The question is to what extent new measures will offset an adverse effect stemming from higher tariffs. Either way, the net effect could not be as good as it may seem because of two reasons. First, both Chinese and US consumers will be affected by increased duties (do not that tariffs being introduced by the US have been not so harmful for individuals so far) which may limit their spending and thereby weigh on economic growth. Second, additional measures planned by Beijing will inflate a level of debt in the country which has recently been cracking down on that issue. Therefore, in our view the net effect of both activities will be negative, hence a potential bullish market reaction in response to new measures in China, if anything occurs when the country unveils more details, could prove to be very short-lived.

Markets respond

In the morning we are seeing notable declines in the Shanghai Composite being down 1.6% while the Hang Seng (CHNComp) is sliding 0.8%. In turn, moods in Japan and Australia have been much better with the NIKKEI (JAP225) climbing 1%, and the S&P/ASX 200 gaining 0.6%. In the currency market one may notice a slight capital inflow toward JPY and CHF as both currencies are up against the greenback. In turn, looking beyond the G10 space one needs to focus on the Turkish lira being (once again) 0.6% down against the US dollar. Its performance may have been also deteriorated by the news released by the United States on Thursday. Namely the country chose to terminate a Turkey’s preferential trade agreement allowing it to export goods to the US without any duties. Turkey had been placed on this list last year but now the US judged the country “is sufficiently economically developed”. On the other side, the US halved a 50% tariff rate on imported steel from Turkey.

The Hang Seng has fallen in recent hours in response to the China’s commentary regarding the trade dispute with the US. The major support remains nearby 10580 points. Source: xStation5

In the other news:

• New Zealand’s manufacturing PMI for April rose to 53 from 52