After initially sliding sharply lower following the Trump admin’s announcement of a 10% tariff on another $200BN in China imports starting Sept. 24 (and rising to 25% on Jan.1), S&P futures, Chinese and emerging markets, as well as global currencies staged a strong rebound after what the market deemed to be a measured response by Beijing. Furthermore, the tariff “wasn’t the worst scenario” that some had expected, and since China’s response was “within expectations” according to SBI Securities’ Tsutomu Soma, the latest trade war round has proven to actually be positive for risk, as shown below.
While China did vow to retaliate to the latest US tariffs saying it has “no choice” but to implement counter measures, the statement from the Ministry of Commerce didn’t list specific actions, although previously China said it would respond with levies on $60 billion worth of U.S. goods.
“The U.S. side insisted on imposing tariffs, which has brought new uncertainty to the bilateral negotiations,” the commerce ministry statement said. “We hope that the U.S. side will recognize the negative consequences of such acts and take convincing measures to correct them in a timely manner.”
Adding to Beijing’s tempered reaction, the foreign ministry said in a separate briefing that it would announce countermeasures “at an appropriate time” without elaborating. “While casting a shadow over Asia, the immediate market reaction may be limited given that tariffs on $200 billion of Chinese imports have been in the pipeline for a while,” said TD Securities EM strategist Mitul Kotecha.
Still, any Chinese retaliation risks deepening the standoff further, with Trump also warning on Monday that the U.S. will immediately pursue additional tariffs on about $267 billion of Chinese imports if Beijing hits back. The gradation of escalated moves is shown in the Bloomberg chart below.
For now, however, in a similar response to what happened the last time Beijing took its time to respond to US sanctions, after sliding at first, Chinese stocks staged a strong response, with the Shanghai Composite closing sharply higher, up some 1.8% and just below 2,700 to end Tuesday trading.
At the same time, China’s yuan pared its drop as traders had anticipated an even harsher round of sanctions.
US futures meanwhile also rose after an initial kneejerk reaction, after the narrative shifted to how “watered down” the tariffs were, as it will be at least three months before they hit the 25% level some investors have been preparing for.
Following in the foosteps of the SHCOMP, Asian equities recovered from early weakness, with benchmarks in Japan and Shanghai jumping. Europe was also stronger, and the Stoxx Europe 600 Index also overcame a soft start as automakers and miners advanced.
The escalation in the trade war proved to also be good news for emerging-market stocks, which eked out gains and currencies were steady even as tougher U.S. sanctions and the prospect of retaliatory steps from China prompted economic growth concerns.
The Russian ruble and Asian currencies led peers higher. Russian equities touched a record, and investor demand rose at a South African government bond auction after yields climbed this week to the highest level since December. A bounce-back in developing-nation assets has lost ground as the U.S. tone on trade soured.
“People are positioned and assets are priced for very bad news on the tariff side but the real impact is still minimal,” said Benjamin Jones, a senior multi-asset strategist at State Street Global Markets in London. “The tariffs that have been proposed would not come into effect until well into 2019 and there is a lot of room for negotiation in the meantime. That there were a lot of exemptions too speaks to Trump trying to grab headlines and the real impact being much lower.”
Not everyone bought into the euphoria:
For now, however, the optimists prevail, and a look around the world in FX markets shows that the dollar erased an Asia-session drop after China vowed to retaliate on U.S. tariffs, the yen fell while the China-proxy Aussie and New Zealand dollars led gains in G-10 as they reversed earlier moves. The pound retreated from a six-week high as chances of a November summit on Brexit met warnings over the possibility of a no-deal scenario. Emerging-market currencies gained while the euro fell below the $1.17 handle as Italian bonds slid.
Treasuries slipped as most European government bonds climbed, though Italian debt underperformed after a report of yet more tension over the country’s impending budget
In commodities, oil jumped after from source reports said that Saudi Arabia is said to be comfortable with oil above USD 80/bbl, with crude extending on gains seen in yesterdays trade, additionally WTI broke through its 100DMA to the upside. Russia’s Novak also said the rise in oil to USD 70-80/bbl is temporary and sanction driven, and sees the long term price in the area of USD 50/bbl
In metals markets, gold saw an unwinding of safe-haven premiums driven by trade concerns, with the precious metal down on the day. Industrial metals are also largely negative, with all of copper, tin, aluminium and zinc down by over 0.5% on the day, and copper in the red for the third straight session.
Economic data include NAHB homebuilder sentiment. General Mills, AutoZone are set to report earnings.
Top Overnight News
Asian equity markets were mixed with focus centred on the escalation of trade tensions after the US confirmed tariffs on USD 200bln of Chinese imports effective September 24th which will begin at 10% and increase to 25% at year end, while US President Trump also warned that if China retaliates he will immediately pursue tariffs on another USD 267bln of Chinese goods. This pressured ASX 200 (-0.5%) with the index dragged by commodity-related sectors as well as tech stocks following similar underperformance in their US counterparts, while Nikkei 225 (+1.5%) showed resilience on return from its extended weekend amid reports that Japan is to offer measures to lower the trade surplus with US in an effort to avert auto tariffs. Elsewhere, Hang Seng (-0.8%) declined and Shanghai Comp. (-0.1%) traded choppy as participants digested the tariff announcement and a substantial CNY 200bln liquidity effort by the PBoC, with participants also cautious as they await China’s response as Vice Premier Liu He was said to convene a tariff response meeting. Finally, 10yr JGBs were subdued amid gains in Japanese stocks and after the BoJ Rinban announcement for JPY 690bln of JGBs in the belly to super-long end also failed to spur demand.
Top Asia News
European equities are currently in the green, as US-China tariff action has been digested as less severe than was first anticipated with ABN Amro saying that “Given regular FX fluctuations, input prices and flexibility for both importers and exporters to adjust margins somewhat, a 10% import tariff might not have a strong impact on bilateral trade flows”. The DAX is outperforming, whilst the FTSE is the underperformer in Europe with a lack of upside catalysts and softness seen in index heavyweights such as British American Tobacco, ITV and Marks and Spencer. The consumer discretionary sector is lagging its peers, dragged on by Zalando as the co. has issued its second negative guidance revision in as many months.
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In FX, an almost clear divide between winners and losers vs a still generally soft Usd (DXY struggling to sustain rebounds off sub-94.500 lows), with the AUD and NZD leading their major counterparts even though China has now hit back, or at least vowed to fight fire with fire in the latest exchange of import tariffs with the US. Aud/Usd is back on the 0.7200 handle and the Kiwi is hovering just under 0.6600 after little reaction to overnight RBA minutes, and ahead of the latest GDT auction that is expected to extend the run of price declines. The CHF and CAD are next best, with the Franc testing resistance around 0.9600 and Loonie recovering from another dip below 1.3050 following mixed NAFTA comments from Canadian PM Trudeau noting progress towards a deal with the US, but a determination to stand firm by its demands from a renegotiated accord. The EUR, JPY and GBP have all been choppy vs the Greenback, with the single currency attempting to build on recovery gains beyond 1.1700, but retreating relatively sharply on the Beijing verbal retaliation, while Usd/Jpy was absorbing offers at 112.25 before reversing to sub-112.00 levels again on the same wire headlines. Note also, hefty option expiries may exert influence for both pairs into the NY cut, with 1.1 bn in Eur/Usd at the 1.1680 strike and 1.3 bn at 112.00 in Usd/Jpy. Elsewhere, Cable was climbing steadily above 1.3150 before stalling on the aforementioned strike back by China, but also more Brexit banter from all sides. EM – Amidst a raft of rhetoric from Asia and South East Asia about trade wars, sanctions and local currency depreciation, the Lira has emerged weaker yet again, with Usd/Try up to circa 6.3800 at one stage and hardly reacting to more intervention via the CBRT jacking up its RRR to 13% from 7%. Conversely, the Zar and Rub are benefiting from the broadly softer Dollar.
In commodities, oil is benefitting from source reports suggesting that Saudi Arabia is said to be comfortable with oil above USD 80/bbl, with the fossil fuel extending on gains seen in yesterdays trade, additionally WTI broke through its 100DMA to the upside. Russia’s Novak also said the rise in oil to USD 70-80/bbl is temporary and sanction driven, and sees the long term price in the area of USD 50/bbl. In metals markets, gold is seeing an unwinding of safe-haven premiums driven by trade concerns, with the precious metal down on the day. Industrial metals are also largely negative, with all of copper, tin, aluminium and zinc down by over 0.5% on the day, and copper in the red for the third straight session.
On today’s calendar, it’s another sparse day ahead for data with no releases of note in Europe and just the September NAHB housing market index release in the US to watch. Away from that the ECB’s Draghi, Villeroy and Nouy will all speak at an event in Paris however the main action comes away from that with the three-day summit between the leaders of North and South Korea, the UN General Assembly opening, EU Chief Brexit Negotiator Michel Barnier briefing EU affairs ministers in Brussels and Italy’s Finance Minister Giovanni Tria speaking at an event in Milan. Clearly developments between China and the US concerning tariffs will be a big focus also.
US Event Calendar
DB’s Jim Reid concludes the overnight wrap
The highlights yesterday were the negative bias to the global trade story, the sell-off in US tech, and the further rally in Italian BTPs. The latest trade related headlines (detailed yesterday) seemed to dominate the early tempo in Europe as markets nudged lower at the open however more incrementally positive news around Italy’s budget and a lack of any more follow through on the trade news flow at least helped markets to fight back with the STOXX 600 ending +0.12%. However, the US session was once again dictated by tech as the NASDAQ (-1.43%) and the NYFANG indices (-2.20%) fell with the S&P 500 (-0.56%) declining in sympathy. Amazon (-3.16%), Apple (-2.66%) and Netflix (-3.90%) were standouts with the first two having their worst day since 24 April and 20 April respectively.
Just after the bell, it was back to the trade war however. Indeed, President Trump formally announced the implementation of the next round of punitive tariffs on imports from China. The levies will take effect on 24 September and will cover $200bn of goods, including some consumer goods. The initial tariff rate will be 10%, rising to 25% on 1 Jan 2019. This is somewhat more severe than the market had anticipated, given recent speculation for an outright rate of 10%, and the tone of the statement was somewhat hawkish, including an assertion that “if China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267bn of additional imports.”
We haven’t seen any retaliation from China overnight however Vice Premier Liu He is due to hold a meeting in Beijing at any moment to discuss a possible response. Reuters is also unsurprisingly reporting that China will not send a trade delegation to Washington now. As for markets, well the declines for Chinese bourses are fairly modest with the Shanghai Comp and CSI 300 down -0.12% and -0.10% respectively – albeit the former still the lowest since November 2014. The Hang Seng is -0.74% while the Kospi is +0.08%. The Nikkei has actually reopened with a +1.51% rally. Elsewhere the CNY (-0.10%) has pared heavier losses while the likes of the Indonesian Rupiah (-0.36%) and Malaysian Ringgit (-0.17%) are weaker but also only modestly so. US equity futures are down -0.09%.
So worth keeping an eye on all that this morning and a possible China response. Back to yesterday now though where the story in bond markets was another crossing of the 3% level for the 10y Treasury intraday – touching a high of 3.020% but closing just below that at 2.989% and -0.7bps on the day. That’s a decent microcosm of the year so far for Treasuries really. Prior to this go they’ve made 3 attempts at trying to hold above 3%. In April they closed above that level for just 1 day, in May they closed above for 7 sessions in succession (the longest streak so far), and then in August they closed above for just 1 session again. In the May and August instances yields fell as much as 33bps and 20bps from the >3% highs. For the record DB think we’ll hit 3.50% by year end so we think we’ll break out through 3% at some point soon.
Here in Europe all the action in bonds (and equities) were once again in Italy. 2y and 10y BTP yields fell 16.2bps and 13.7bps respectively to close at the lowest since July 25th and August 1st respectively. Bond markets outside of Italy were broadly flat while the FTSE MIB ended +1.08%. Driving this was a story out of Corriere della Sera shortly after we went to print yesterday suggesting that Finance Minister Tria was targeting an upper-limit on the budget deficit of 1.6%. As a reminder, Italy has until the 27th to update its fiscal targets. Our economists note that press reports suggest that officials are still not yet decided on the final target but there’s little doubt that the incremental newsflow has turned more and more positive in recent weeks. As you’ll see in the day ahead, Tria is due to speak today in Milan so it’ll be worth seeing if he confirms the story.
Elsewhere EM FX had a mostly non-eventful first day of the week yesterday with the asset class flat (index closing 0.00%). The MSCI EM Equities index did however end -1.18%. The moves in FX did hide another -2.32% slide for the Turkish Lira however with the news that President Erdogan had called for the opposition party’s stake in Isbank – the largest listed Turkish lender by assets – to be transferred to the Treasury. As well as that Bloomberg also reported that Turkey was looking at measures to support banks with a high stock of bad loans emanating from the collapse in the Lira. The suggested proposals included transferring NPLs to a state-designed entity. One to watch.
As for the other snippets of news yesterday, there were big headlines to come out of the IMF review of a no-deal Brexit including “substantial costs for the UK economy.” Separately, articles in Politico and Reuters suggested that the EU and UK negotiators are working ever-closer to a deal. The articles did not contain any substantive new information, but they did suggest that the tone of negotiations are productive. Most likely, officials will agree to something vague at their Thursday summit, which will be sufficient for Theresa May to claim victory ahead of the 30 Sep – 3 Oct conservative party conference and for negotiators to reach a more formal, but probably still incomplete, exit agreement by November. The Pound certainly seems to share this rosy view, rallying +0.68% yesterday and +3.62% off its August trough.
In the US, Richard Clarida was sworn in yesterday as Federal Reserve Vice Chairman, in time to join the FOMC at their 25-26 policy meeting. We expect Clarida’s views to be close to the existing centre of the committee. In other central bank speak, the ECB’s Benoit Coeure gave an interesting speech about forward guidance, in which he supported the policy and suggested that the Governing Council could, in future, expand forward guidance to “clarify the pace with which policy makers expect to remove policy accommodation beyond the timing to lift-off.” So nothing new about the first rate hike (our economists expect September 2019), but could be relevant next year when the market begins to look beyond that first hike.
On the economic data front, yesterday was relatively quiet. European August inflation was confirmed at 1.0% core and 2.0% headline, as expected. The September US Empire State Manufacturing Survey ticked lower to 19.0 (a positive value indicates expansion). Tomorrow, we’ll get the Philadelphia Fed Business Outlook Survey, which will give another data point for third quarter activity. In August, these two series diverged by the most since 2012, so the Philly index could be due for a bounce-back to further close the gap after the Empire’s soft miss.
In terms of what to look out for today, it’s another sparse day ahead for data with no releases of note in Europe and just the September NAHB housing market index release in the US to watch. Away from that the ECB’s Draghi, Villeroy and Nouy will all speak at an event in Paris however the main action comes away from that with the three-day summit between the leaders of North and South Korea, the UN General Assembly opening, EU Chief Brexit Negotiator Michel Barnier briefing EU affairs ministers in Brussels and Italy’s Finance Minister Giovanni Tria speaking at an event in Milan. Clearly developments between China and the US concerning tariffs will be a big focus also.