Sino-U.S. Trade Dispute Evolves Into Deeper Conflict and Rattles Markets

April 4, 2018

As a presidential candidate, Trump prioritized the U.S. trade imbalance, which he blamed on unfair practices of America’s trading partners. But as president, he acted initially on many other issues, while doing little about trade. Then came the U.S. tariffs on steel and aluminum, which by themselves affected only a sliver of commerce. A month ago, the president tweeted that “trade wars are good and easy to win,” and followed such up by announcing plans to impose a multi-billion dollar package of country-specific tariffs against Chinese goods, against which Beijing has now responded predictably with tariffs on more than 100 U.S. products. Oddly, the U.S. president now denies a trade war, but this sequence is indeed the dynamic of one.

Stock markets don’t like the prospect of a trade war between these two behemoth economies one bit. Overnight, equities fell 2.3% in Hong Kong, 1.4% in South Korea, 2.1% in Singapore, 1.2% in Indonesia, 1.1% in India but just 0.2% in China. European markets have thus far chalked up looses of 1.3% in Germany, 1.1% in Switzerland and Italy, 1.0% in Spain, 0.9% in France, and 0.6% in Great Britain. U.S. futures suggest a significant loss at the open, too.

Wealth is flowing into safer securities. The 10-year Treasury yield in futures has dipped 2 basis points, as did the British 10-year gilt. The German bund is a basis point softer.

The dollar is weaker, which would be consistent with President Trump’s long-term desire. The dollar fell overnight by 0.5% against the euro and 0.4% versus the yen. It’s also 0.5% softer relative to the kiwi but up 0.5% versus the peso and 0.2% against the yuan and sterling.

Gold had risen 0.8% but industrial metals have dropped sharply. WTI oil sank 1.4%.

There was other worrisome news from purchasing manager survey releases.

  • Japan’s services and composite PMI readings fell to 17-month lows of 50.9 and 51.3, respectively.
  • Russia’s services and composite PMI scores of 53.7 and 53.2, indicated the slowest rates of expansion since last July and October, respectively.
  • China recorded four-month lows in both its service-sector and composite PMIs.
  • The British construction purchasing managers index dropped 4.4 points to a 20-month low of 47.0 and was below the 50 level that separates expansion from contraction for the first time since last September.
  • Singapore’s PMI slipped 1.6 points to a 2-month low of 53.7 in March.
  • A 46.5 private PMI in Lebanon following February’s 10-month high was the lowest reading so far in 2018.
  • J.P. Morgan’s estimated global manufacturing purchasing managers index dropped 0.8 points in March to a 5-month low.

The Fed still seems undeterred by jittery world financial market activity. Governor Brainard in an address last night express the views that stocks remain elevated and vulnerable. She wants to see banks holding more capital.

Unemployment in the euro area edged 0.1 percentage point lower to 8.5% in February, which was the best level since the end of 2008.

Euroland consumer price inflation rebounded to 1.4% in March, highest since December but in line with market expectations. A core inflation rate of 1.0% for a third straight month was a bit less than forecasters were expecting.

British shop prices in March were 1.0% lower than a year earlier, the biggest on-year decline in a bit more than 12 months.

Building approvals in Australia fell 6.2% in February but posted on-year growth of 5.5%, which lay between the 12-month increases recorded in December and January.

Retail sales in Australia rose 0.6% in February after a 0.2% uptick in January, and they were 2.7% higher than a year earlier.

New Zealand consumer sentiment recorded a third consecutive month-on-month increase in March, albeit by just 0.2%.

The Central Bank of Sri Lanka reduced its Standing Lending Facility Rate by 25 basis points to 8.50% but held its deposit facility rate steady at 7.25%, thus narrowing the rate corridor. The last changes in these rates, a rise of 50 basis points in each, occurred in July 2016.

The National Bank of Romania’s monetary policy rate was kept at 2.25%, a level reached after a 25-basis point hike in February. The rate also had been raised in January.

ADP estimates that a robust 241K private-sector jobs were created on net in the United States last month. The Labor Dept monthly data get released Friday.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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