Wall Street sinks following Chinese retaliation

Summary:

• Stocks in the US plunged on Monday after Beijing announced it would raise tariffs on US goods
• Fed’s Rosengren says it is premature to judge an economic impact of the trade dispute with China
• Unstable environment for NZ exports could weigh on the economy, NZ finance minister says

Wall Street suffers from trade war escalation

US stocks plummeted on Monday after Beijing reported it would increase tariffs on US goods effective on June 1. The details revealed by the Chinese Ministry of Finance showed that a 10% rate on 2493 items would be raised to 25%, a 10% rate on other 1078 items would be raised to 20% and a 5% rate on 974 items would be raised to 10%. The statement also suggested that a 5% rate would continue on 595 items, whereas auto parts would still be excluded (these items have been exempted from tariffs since December). In practice, China announced higher tariffs on $60 billion of US goods, making the trade dispute with the United States yet more complicated. Let us also remind that Donald Trump warned earlier that China would be in a tough situation once it relataliated. In our view, the step undertaken by Beijing makes it harder to reach any binding agreement between the world’s two largest economies. Meanwhile, Donald Trump tweeted overnight that in three to four week he would know if the talks would be successful. This is exactly the time the US tariffs need to kick in at a full scale (keep in mind that these tariffs are not applied to goods being already in transit). In response to revelations from China US equities finished Monday’s session well below the Friday’s with NASDAQ (US100) sinking as much as 3.4%. Among the largest losers one may find Microchip Technology (-6.3%), Nvidida (-6.1%) or Apple (-5.8%). Other indices also ended yesterday’s trading in dismal spirits - both SP500 (US500) and Dow Jones (US30) lost 2.4% each.

Looking at the technical chart below of the US500 one may arrive at a conclusion that the price has already reached the key technical support. Namely, the price failed to break below 2810 points yesterday. This level provided bulls with the strong technical area in the past, hence they may hope that history will repeat itself this time around. Do notice that this zone is also underpinned by the 23.6% retracement of the latest bullish move. Source: xStation5

Trade war’s impact on US economy

While the trade war between the US and China escalates, there is still uncertain how much damage it will bring to the US economy. Fed’s Rosengren said in his interview on Bloomberg TV that most estimates suggest rather a modest impact on economic growth from the higher tariffs and that it is still too early to judge the impact of the trade conflict with China. It needs to be aware that in the longer-term any constraints imposed on free trade tend to exert downward pressure on economic growth and upward pressure on price growth - a mixture the Federal Reserve (and any central bank in the world) does not want to see. So far the impact on price developments in the US has been limited to specific products and has yet to broaden to the entire economy. However, taking into account that the trade battle keeps escalating, the risk to see higher inflation and lower GDP growth has also increased.

The US dollar remains little changed this morning and it is likely to lose some of its momentum during the day as sentiment seems to be improving to some extent - SP500 futures are rising 0.5%, the Japanese yen is falling 0.3%. The NZ dollar and the Norwegian krone are among the best performers at the time of preparing this analysis. In terms of the former one needs to mention comments from NZ finance minister who warned that the unstable environment for NZ exports, in the wake of Brexit and the US-China trade war, could negatively affect the economy.

After falling below 0.66 the pair has been unable to come back above this line. The first support bulls may look at is localized nearby 0.6520. Source: xStation5

In the other news:

• The index of Australian business confidence for April ticked up to 0 from -1, the index of business conditions declined to 3 from 7

• A Japanese current account surplus for March rose to 3020 billion JPY from 2677 billion JPY