Chinese authorities reacted immediately after US’ tariff threats warning that Beijing will be taking retaliatory measures against imposed tariffs. The exchange of threats between the two largest economies is yet to stir uncontrollable panic, but it is likely that this calmness will only last until the first issues in the macroeconomic data. On Thursday, the major currencies fluctuated slowly at the the opening of the Asian session, but the dollar ‘lost its nerve’ progressively towards the end of the session. Regarding Trump’s struggle with trade imbalances, investors in the US are switching between euphoric feelings about a potential take-off in some sectors and the fear that the president could take extreme measures. It was expected that closer to the introduction of tariffs and the release of more details about the restrictive measures, as well as the NFP, the dollar would fall to the lower border of the channel 94.50-94.00, and it is evident that this is the course that the dollar is taking.
The tariffs of the Trump Administration, which will affect 34 billion dollars of Chinese exports to the US, will come into force at 04:00 GMT on Friday, meaning that it will be passed noon for Beijing. However, the tariffs aren’t expected to have immediate negative consequences as company evaluations are yet to suffer from shocks in the stock markets. Similarly, the Chinese stock market hasn’t experienced any sort of turmoil, however it is difficult to call the situation stable as at the end of May, the Chinese blue chip index recorded a capital outflow of almost 15%. At the same time, the DOW industrial index lost about 5 percent since the beginning of June, while it managed to catch on to the technical level of the 200-day moving average, a long stay in lower levels could turn the market into a bearish situation.
The basic technical picture for the stock indices of the two giants is as follows:
Investors in the Chinese market were less confident in their positions, therefore, despite the fact that China is ready to fight the United States on an equal footing, investors do not see China as an equal rival with the United States. ShCOMP moved into a full-fledged bear market and it is likely that only inexperienced speculators will bet on the growth of blue chips. Of course, the softening of the positions of the US and China in the trade war could allow the Chinese market to bounce back, but the chances for such an outcome are mostly poor, so most investors in China are now being patient. China’s inability to engage in such squabbles is the result of the Chinese economy’s dependence dependence on external demand, while the US relies primarily on domestic demand and as such, it is less vulnerable to external trade shocks. Despite the measures taken by the Chinese authorities to force economic growth to rely on domestic consumption, such a transition will take a long time and will likely double with transformational downturns as this will reduce the support for manufacturing.
Trump warned that the escalation of the trade conflict could result in large-scale tariffs that would affect 450 billion Chinese exports to the United States. Beijing responded that it would not open fire first, but if the US tariffs begin being implemented, China will respond. China’s Minister of Commerce Feng reproached the US for undermining the smooth running of the global trade and supply mechanism and the inexpediency of tariffs that are likely to affect not only US and Chinese companies, but also launch a cost-recovery response for companies from other countries, which could slow the growth of the global economy. According to Feng, China will not bow to the US and will defend the right to conduct free and multilateral trade. Foreign companies operating in China will not be used as a tool of pressure on the US administration and their rights will be protected.
The official noted that almost 20 billion dollars of the Chinese goods exported to the US, for whichtariffs will be introduced, are made by foreign companies. At first glance, this may seem illogical, since if the Trump administration wants concessions from China, it is the Chinese companies that are to be punished. However, the local producer will be easy to help, given the level of centralization of the Chinese economy, while a foreign company feeling uncertainty and loss of the benefits of manufacturing in China may decide to relocate production, i.e. Trump’s target is to undermine China’s main advantage.
In the foreign exchange market, the dollar sharply lost its position on Thursday, giving the euro a level of 1.1700. GBPUSD is trying to overcome the level of 1.3250 in the expectations of the speech of the head of the Bank of England Mark Carney in Newcastle. New information on the policy of the ECB can probably be obtained from ECB officials Mersh, Novotny and Nouy whose speeches are due today.
The Chinese yuan has lost a little more today, without prospects for a quick recovery. The rebound of the yuan after the fall below the psychological mark of 6.7 was due to the intervention of PBOC. It should be noted that exporters in China should feel comfortable with the devaluation of the currency, however, intervention may be necessary to suppress panic among foreign investors and retain predictable currency conditions for exporters.
This evening, the protocol of the Fed meeting in June is scheduled for release. It is unlikely that the market will draw from the protocol something unexpected, but the assessment of the Fed threat of tariffs and possible reactions to accelerating inflation will help to clarify the pace of interest rate hikes. Tomorrow, of course, all attention will be focused on the report of the NFP.
Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.