Commodities bear brunt of escalating trade restriction actions and emerging economies also buffeted, but New Zealand gets off very lightly

By Nick Smyth

After much anticipation, the US administration announced tariffs on $50b of Chinese imports on Friday with the Chinese government responding in-kind later that day. Commodities, commodity currencies and emerging markets reacted negatively to the threat of a “trade war”, although there has been little impact (yet) on US equities or bonds. Against this backdrop, the NZD has fallen to 0.6950, a three-week low.

The big news on Friday was the US administration’s decision to impose 25% tariffs on $50b of Chinese imports, as had been foreshadowed by various media reports earlier in the week.  Tariffs that affect 818 products worth $34bn in annual trade are due to come into effect on 6 July with the US administration saying it would consult on tariffs on the other $16bn of products, and would apply these later.  It didn’t take long for China to respond, with the Ministry of Finance announcing on Saturday morning that it would impose 25% tariffs on $50b of imported US goods (heavily tilted towards agricultural products). The Chinese ministry also said that the previous agreements reached in the bilateral US-China trade negotiations were now off the table. 

With President Trump having said he would respond to Chinese retaliation with yet more tariffs, the stage is potentially set for more escalation in the trade conflict. On Friday, Reuters reported that US officials were close to finalizing a second list of tariffs worth $100b (requested by Trump back in April) while US Trade Representative  Lighthizer said that the US would announce investment restrictions on China in the next two weeks.

While an all-out trade war would be unambiguously bad for global growth and risk assets, the US equity and bond market reaction was fairly muted.  The S&P500 fell around 0.75% intraday in response to the trade news but rebounded to end the day only 0.1% lower (and flat for the week).  Meanwhile, the 10 year Treasury yield was down a modest 2bps on the day, to 2.92%.  It’s possible the market sees Trump’s decision to impose Chinese tariffs as part of a negotiating strategy that will ultimately lead to compromise (he has after all made numerous policy U-turns during his term in office), although the verdict is still out.   The IMF warned last week that retaliatory tariffs would have “serious” macroeconomic implications. 

Commodities bore the brunt of the tariff-related news on Friday, with Brent crude oil down over 3%, copper down over 2% and soybeans (which China has targeted with tariffs) down 2%.  Last week’s weak Chinese data (retail sales, fixed asset investment and industrial production) had already raised concerns about a slowdown in the Chinese economy, and the risk is that trade tariffs will further harm demand for commodities.  The CRB commodity index fell 1.4% to a two-month.  OPEC and Russia meet later this week in Vienna amidst the prospect of an increase in oil supply (although Iran over the weekend said that it, along with Iraq and Venezuela, planned to veto any supply increase). 

There was also weakness in Asian EM currencies on Friday, with the South Korean Won down 1.3% and the Thai Baht down almost a percent.  The JP Morgan emerging market currency index is near its lowest level since November 2016. 

Against a backdrop of commodity weakness and some growing trade war fears, the NZD fell around 0.4% on Friday, with similar moves seen in the AUD and CAD.  Most of the move lower in the NZD occurred during the Asian session, with the currency fairly range-bound after the NZ close.  The was little impact in FX from stronger US consumer confidence and Empire manufacturing surveys, with the data very much overshadowed by news on trade. 

The EUR recovered slightly from the large falls seen in the aftermath of the ECB meeting on Thursday night.  The EUR was up 0.3% on the day to just above 1.16, although it remains near year-to-date lows.  The ECB’s Sintra conference starts this week and the market will closely watch the speech given by ECB President Draghi, although we would be surprised if his message materially deviated from that given at the ECB meeting last week.  Several other central bankers will be speaking at Sintra including Fed Chair Powell. 

Also ahead this week is the BoE meeting on Thursday (no change expected) and the European flash PMIs.  The latter will garner attention given the slow-down in European activity indicators this year.  Locally, NZ GDP is released on Thursday, and we are looking for a 0.5% increase on the quarter (albeit with downside risks), in line with consensus. 

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