Spot values at a glance:
Stocks in Asia declined with US equity futures, industrial metals and China’s yuan after the Trump administration released the biggest list yet of Chinese goods it may hit with tariff increases, a move that China said will force it to retaliate. Treasury yields ticked higher while gold and oil slipped.
Trump Plans for More Tariffs:
The Trump administration pushed ahead with plans to impose tariffs on an additional $200 billion in Chinese goods by releasing a list of targeted products, escalating a trade war that may soon directly hit American consumers. The 10% tariffs could take effect after public consultations end on Aug 30, according to a statement from the US Trade Representative’s office Tuesday. The proposed list of goods includes consumer items such as clothing, television components and refrigerators as well as other technology products, though it omitted some high-profile items like mobile phones.
If the tariffs proposed Tuesday go into effect, duties implemented by the administration aimed squarely at China will cover nearly half of all US imports from the Asian nation, Bloomberg news reported.
The Trump administration on July 6 imposed 25% duties on $34 billion in Chinese imports, the first time the president has implemented tariffs directly on Beijing after threatening to do so for months. The first round of tariffs covered Chinese products ranging from farming plows to machine tools and communications satellites. China immediately retaliated with duties on the same value of US goods, including soybeans and cars.
So far, tariffs imposed by the 2 countries are expected to have a modest impact on growth and inflation, economists estimate. But duties on more than $200 billion in Chinese imports may push the trade war into territory where it begins to bite meaningfully into growth. A full-blown global trade war would shave 0.4 percentage point off world growth, according to Bloomberg Economics.
Ways China Can Retaliate to Trump’s Tariffs:
Donald Trump’s threat to impose tariffs on an additional $200 billion of imported Chinese goods could see China retaliate with a wide range of non-tariff barriers. Because China only imports around $130 billion worth of goods from the US, its ability to match the tariffs dollar-for-dollar is limited. The US imported$505 billion of goods from China last year.
While China may jack up existing tariffs beyond the 25% level imposed so far, it could also inflict significant pain by increasing regulatory oversight of American companies, slowing down approvals processes, canceling orders for US goods or encouraging consumer boycotts.
China can also opt to weaken the yuan, which is the worst-performing currency in Asia since mid-June, sliding more than 3%. As a last resort, there’s the ‘nuclear option’, which is to unload some of its huge hoard of US Treasuries, though this would seem unlikely as China stands to suffer greatly as well.
Temasek Holdings to Slow Investments as Trade Woes Spread:
Temasek Holdings Pte., the Singaporean state investor that signaled its intent to slow its investment pace, fears that slowing economic growth in the US adds to mounting risks just as trade tensions are weighing on global confidence and capital spending.
A lot of the spare capacity in the US economy has “disappeared,” creating the risk that the US could eventually roll into a recession as the Fed keeps hiking rates, Head of Strategy Michael Buchanan said in a Bloomberg TV interview in Singapore on Tuesday. That’s coupled with escalating trade rhetoric and rising US tensions with the likes of Europe and Canada, he said.
Temasek, which poured $95 billion into everything from startups to asset managers in the past 5 fiscal years, is among investors turning more cautious as threats to the global economic expansion mount. The firm said at its annual briefing that it may slow investment for 9 to 18 months, citing rising risks, volatility and the likelihood of moderating global growth. The value of the Temasek portfolio climbed 12% to S$308 billion in the year to March 31, the second straight record, it said Tuesday.
Bank of Canada Monetary Policy Decision Due Today:
The Bank of Canada is set to release its latest decision at 10 a.m. Wednesday in Ottawa, and there are three plausible outcomes, as reported by Bloomberg news:
- The most probable is policy makers will raise the overnight interest rate, currently at 1.25%, for a fourth time in 12 months to keep inflation under wraps, while acknowledging future hikes will be gradual because of the recent trade upheaval. Markets are placing the highest odds on this scenario, which includes additional hikes every 6 months or so until the benchmark rate settles around 2% or 2.25% by the end of 2019.
- A second possibility is an increase that is accompanied by very cautious language that casts doubt on the timing and pace of future moves, a scenario known in central banking lingo as a dovish hike. Essentially, that would mean a rate hike now at the expense of one down the line.
- A third option has Governor Stephen Poloz abstaining altogether. In this case, he would almost certainly indicate rates are heading quickly higher, a so-called hawkish hold.
Poloz faces a delicate task. With inflation already above the central bank’s 2% target and heading higher, and with financial conditions still very loose, he needs to keep wage and price pressures in check. At the same time, moving too soon and too fast could inadvertently trigger a downturn, in part by inflating the Canadian currency, at a time when the economy is awash in risk.
Australian Consumer Confidence Rises:
According to Bloomberg news, Australian consumers don’t seem too fazed by Donald Trump’s trade war, despite their nation relying the most on China among developed economies. Consumer confidence soared to the highest since November 2013 in a survey taken between July 2 and 7, with Aussies feeling particularly optimistic about the next five years. Planned income-tax cuts may have helped lift their mood. Businesses, on the other hand, aren’t so chirpy: a survey out Tuesday showed firms’ confidence at the lowest since October 2016.
USDSGD rose for a second straight day, climbing back to the 1.3600 handle, following USD strength. Despite its weakness against the USD, SGD is displaying some resilience against currencies of Singapore’s trading partners.
According to analysts from JPMorgan Chase & Co., the Singapore dollar is one of the few currencies to own during a US or global recession; the other currencies are the Swiss franc, US dollar and Japanese yen.
Resuming its longer-term downward trend, AUDUSD retreated back to the 0.7400 handle earlier today, after the US released a list of $200 billion worth of Chinese goods slated for tariffs. The year-to-date low of 0.7311 reached last week is expected to be retested again soon. A climb back above 0.7600, which seems unlikely at this point, signals a possible reversal.
USDCAD remains largely unmoved from last night’s close at 1.3142 ahead of tonight’s Bank of Canada’s monetary policy decision. According to Commodity Futures Trading Commission data covering the week ended July 3, hedge funds and other large speculators have amassed the largest bearish stance in the Canadian dollar since June 2017.
The swollen position could become an issue heading into the BOC’s policy meeting Wednesday, with 96% odds that the bank will raise rates for a second time this year, according to overnight index swap pricing on Bloomberg. A retreat back below 1.3000 could be on the cards if a more-hawkish-than-expected monetary policy decision is made tonight.
USDCNH rose sharply today, after the US pushed ahead with plans to impose tariffs on an additional $200 billion in Chinese goods by releasing a list of targeted products. Onshore yuan is headed for its weakest closing level since August 2017.
Despite today’s fresh yuan weakness, currency forecasters who correctly called the yuan’s recent downtrend all see China’s currency strengthening in the second half, Bloomberg news reported. mong their reasons for the yuan’s advance are a falling dollar, an anticipated easing of China-US trade tensions and the willingness of the Chinese authorities to defend the currency.
USDJPY retreated from a 6-week high earlier this morning but has since pared its decline to recover back to the 111 level despite risk off sentiment stemming from the US-China trade war. The pair’s recovery could be indicate either investors aren’t overly worried about further trade war escalations or that markets are instead focused on growing Fed-BOJ monetary policy divergence. The key resistance remains at 111.40.
GBPUSD pared a portion of Tuesday’s decline earlier today, as Brexit concerns continue to cloud the outlook of the pound. 5 key members of the UK’s parliament have resigned from their posts within the UK’s Brexit department at the outset of the trading week, decrying Prime Minister Theresa May’s latest “third option” Brexit proposal.
Continued uncertainty is expected to drive the currency pair lower, with a retest of the year-to-date low at 1.3050 a distinct possibility over the medium term.