The well documented next stage of US tariffs on Chinese goods has been announced this morning by President Trump and the market has reacted in line with expectation with futures and risk trades taking a hit. There is a bit of a reprieve in the announcement as the level has been kept to 10% on $200 bio starting next week until the year end when it will rise to 25%, but there is no doubt that this step is another move forward in what could be a long lasting trade war between the two nations. The market is now waiting for the Chinese response with a strong expectation that they will confirm that they will not be engaging in fresh talks with the US administration at this stage.
The US stock markets had already finished the day well in the red as expectation of the pending move had eroded investor sentiment during the trading day with technology stocks particularly vulnerable, the Nasdaq closing down 1.43%. The dollar had pulled back slightly the earlier sessions and this was helped by positive news on Brexit with a report that the EU will be happy with a frictionless Irish border helping to increase the probability of a deal sooner rather than never, Euro and Cable both gained during the day and the Dxy dropping 50 points to the 94.50 level.
Looking ahead to today’s session and investor focus will be firmly on the Chinese response to US tariffs and the next stage in the growing trade war. It’s unlikely that China will hit back with full reciprocal tariffs as we’re starting to hit levels where the numbers simple can’t be matched due to the balance of trade between the countries, however there are other measures that the Chinese can take and it is likely that the ‘devil will be in the detail’ of China’s next move. Certainly further depreciation of the Yuan could be expected in these circumstances, not only from a fundamental point of view but further weakening will help to soften the tariff blow and the PBoC may be less inclined to take action in this environment. Other more direct action can be taken and investors will be preparing to react if the Chinese now take the baton from the US side and go on a more aggressive footing.
We do have some other risk events due today which will act as slight distractions to the ongoing trade feud. First up, we have the latest Monetary Policy Meeting Minutes from the RBA and these will be closely monitored, but once again the Aussie’s status as a good risk proxy will lead to most moves today being dictated by risk sentiment rather than underlying fundamentals, we’ve already seen it drop 30 pips on this mornings news. The only other major events on the calendar come later in the day with ECB President Mario Draghi set to speak early in the London session and Canadian Manufacturing Sales due out at the start of the New York trading day.