The US-China trade war has heated up but the market is taking this in its stride. Initial market movements on headlines haven’t been sustained. Net FX movements have been minimal, apart from the NZD, which has outperformed owing to flows than fundamentals.
Yesterday the US released a list of 1300 categories spanning $50b of imports from China that could be subject to import tariffs of up to 25%. In a tit-for-tat response, late in the day China placed tariffs of up to 25% on major US imports including airplanes, autos and soybeans, covering 106 categories of products and affecting $50b of goods. China has been strategic in the 106 items chosen, choosing sectors that may prove more vulnerable to Trump’s key supporters.
S&P futures dived and safe-haven currencies outperformed on the news of China’s response, which was meatier than its original imposition of tariffs affecting just $3b of trade. But that move has since faded as the market takes a more positive view on the outlook, seeing China’s response as all part of the negotiating process or the “art of war”. China has not specified a date for the tariffs to start and will wait for the US to implement the tariffs, which themselves are subject to consultation. China’s Vice Finance Minister said that the country will “keep its door open for dialogue” and that it “wants to solve trade issues in constructive ways”. Representatives from the Trump administration also left the door open for a negotiated solution.
Alongside US-China trade tensions there have been a number of key economic releases, but market reaction has been minimal. Soft UK construction PMI data has been put down to bad weather. Euro area CPI inflation showed the expected pick-up to 1.4% y/y but the core measure of CPI (not an ECB target) was slightly weaker at 1.0% y/y. US ADP employment was very strong. The US ISM non-manufacturing index came off its previous super-high level, while the employment component was stronger.
Looking at the markets, the S&P500 fell by about 1½% on the open but has since recovered strongly and now the index shows gains of about 0.6%. Technicians note that a positive close after the poor open would represent a bullish signal for the near term.
Most currencies have shown only modest changes since the NZ close and since this time yesterday, however the NZD is the exception, up 0.7% since 7am yesterday, now back above the 0.73 mark, and up on all the crosses. There has been no fundamental reason for the move. QV house price data were released this morning showing the strongest annual gain since June 2017 at 7.3% y/y, in line with some previously released data showing some improvement in the housing market. NZD/AUD met some resistance a pip below 0.95 and is currently 0.9480. NZD/JPY is trading near 78. NZD/GBP is closing in on 0.52 and NZD/EUR is up to 0.5950. The NZ TWI is at 75.35, just above the mid-point of the 74-76 range it has been stuck in for much of this year.
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