Wall St falls as Trump starts trade war; major new tariffs aimed at China; US eyes $1.3 tln stop-gap funding; China readies trade response; PMI's reveal rising costs; UST 10yr at 2.84%; oil down and gold up; NZ$1 = 72.2 USc; TWI-5 = 73.3

Here's our summary of key events overnight that affect New Zealand, with news the opening shots in a serious trade war are now being fired.

On Wall Street the three major equity indexes fell -1.5%, on track for their steepest drop in six weeks, gripped by the growing threat of a global trade war.

The US Administration announced it will impose tariffs on about US$60 bln of imports from China, as well as impose restrictions on technology transfers and acquisitions by Chinese companies. A range of countries ("allies") are to be exempted from the steel and aluminium tariffs, but New Zealand doesn't appear to be one of them. Nor is Japan.

At the same time, Congress is working its way through passing a massive stop-gap funding bill, designed to keep their Federal Government operating until September. It is a pork-laden US$1.3 tln measure with something-for-everyone, except perhaps some Trump-favoured projects. There is little in there for the "border wall", for example.

Meanwhile, China is reported to be readying a trade war response against the US with their own tariffs focused on American exports of soybeans, sorghum and live hogs. These products are core US exports and originate in states that are at the core of Trump's support base. Officially, they say they will take “all necessary measures” in response. Keep an eye on what the China does regarding tariffs on commercial aircraft. Yesterday, a unit of China Southern Airways has signed a US$3.2 bln deal to purchase 30 narrow-body planes from Boeing. Huge future orders are in play here and this is a real leverage point for China.

And China lifted a key interbank interest rate yesterday in response to the US Federal Reserve’s raising of its key lending rate in a likely bid to fend off potential downward pressure on the yuan and a possible surge in capital outflows. The increase is the third time in a row that China has shifted interest rates following a Fed move.

In the real world of business activity, the US factory PMI reading for March is strong but the same reading for services slipped. Of note is the reported rises in input costs which are said to be rising their fastest in four years. In Europe, the pace of expansion has slipped to its lowest point since the start of 2017. And in Japan, they are reporting improvements, but at a slower rate.

In New York, the UST 10 yr yield is lower today at 2.84% after a flight to safety following the opening salvos in the Trump trade war. This has completely overshadowed the Fed's hawkish dot plot from yesterday, but investors should note that this remains in place.

The gold price is up +US$2 today and now at US$1,327/oz.

Oil prices are marginally lower today and now at just under US$64.50/bbl and the Brent benchmark now just under US$69/bbl.

The Kiwi dollar will start today little changed at 72.2 USc, even after the US tariff news. On the cross rates we are ½ higher at 93.7 AUc and at 58.7 euro cents. That puts the TWI-5 at 73.3.

Bitcoin is now at US$8,670 which is -1.3% lower than this time yesterday.

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21 Comments

Is the black swan flapping its wings?

I guess reciprocating on tariffs is not that easy, but listening to RNZ this morning i wonder why people are surprised when they go to China to have their high tech products made cheaply and then find that China steals the tech and IP. they obviously thought their wealth and greed would protect them from that happening - DOH!

Here’s Why China’s Yi Gang Has a ‘Very Difficult Job’

Money supply up 19x in 15 years, wow

https://www.bloomberg.com/news/articles/2018-03-19/yi-gang-s-very-diffic...

https://asia.nikkei.com/Politics-Economy/Economy/China-s-regional-GDP-sl...

Wow that does seem to be massively unfair of Mr Trump at allow exemptions to his allies on tariffs and NZ is not regarded as on of their allies in trade.
I wonder does Mr Trump regard NZ as already being owned by China or are we just too insignificant to be included as an US allie in trade?

If it has an impact we can respond by removing our military aid to the US. I think he's oblivious to all of the issues he's creating for the US.

Agree. We should pull our 2 air force Hercules from any military operations with the US. They're going to regret it now. Big mistake, Mr Trump, big mistake. :D

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I think it would be unfair to say that President Trump has initiated a "trade war". The fact of the matter is that China for decades has been plundering the intellectual property of Western companies including from NZ. China has a mercantile outlook on trade and, therefore, they have started this war as they don't see win-win situations only win-lose. It's about time that someone in the West took a stand and fought them. Hopefully, China will stop stealing the IP of people.

China already imposes hefty tariffs on American imports. It is about time that they stop treating China as a developing nation. It was only very recently that they stopped getting foreign aid.

Just visit China and see far technologically we are behind....IP may need to be transferred back now....the tides are reverting.

That's not really true - the IP is from the West. The difference is that they don't have legacy systems so can leap over it. For example, they did not have EFTPOS so could leap to WeChat Pay etc. We do have the equivalent but EFTPOS is just as easy so no real point. This applies to a number of areas.

China has given away more IP over the centuries than anyone. As far as I'm concerned if you can't protect your IP it's fair game for others to innovate it, adapt it and use it to their own advantage.

Didn't WW1 start as a result of protectionism and trade wars?

Economic imbalances lead to war. Quite a few imbalances in this morning update.

it started because of the assassination of one of the Hapsburgs in Serbia, Franz Ferdinand, I think nephew of the emperor of the austro-hungarian empire

As far as I can tell the key decision was the Russian autocrat's decision to mobilise their million man army which meant the Germans and French mobilised their million strong standing armies too. From the German point of view, being surrounded, they needed to destroy the strongest army in Europe first, and so invaded France asap, hoping to take Paris before the French figured out what was going on.

Britain, not being an infantry nation and having only 7 divisions, only joined in because the German High Seas Fleet had become a significant threat to the Royal Navy's domination of the international sea lanes. Also, Britain had a 500 year old policy of supporting the number two power in Europe so that no one country became too powerful.

It is a long and complicated story that goes back to the latter part of the 19th century.
Russia was becoming increasingly economically, industrially and militarily powerful. They threatened the whole British Far Eastern and Middle eastern empires. Britain was very stretched in trying to defend this huge empire, and were very vulnerable to loosing it.
Later on the Germans also began to become prosperous and powerful. This particularly scared the French but also the British.
The British put effort into appeasing the Russians and accommodating (but containing) their aspirations in Persia (The Black Sea). In the context of this rapprochement the Russians were drawn into an alliance between France, Britain and Russia. The assassination was just the lighting of the fuse.
When you look at all that WW1 was mostly based on the competition and clash of three empires. I suppose that you could say protectionism and trade wars are the modern day equivalent of this and that they are just the battle fronts of the American and Chinese empires. The way that China has behaved in the past, it is clear that it is more interested in a imperialist winner takes all trade war, but then the USA has in the past always wanted things there own way.

Interesting, there is a theory that rising interest rates are the actual cause of rising inflation, since interest rates are a key cost for all businesses. In which case, this is not surprising at all:
In the real world of business activity, the US factory PMI reading for March is strong but the same reading for services slipped. Of note is the reported rises in input costs which are said to be rising their fastest in four years.

https://fred.stlouisfed.org/series/USD3MTD156N

It is true that correlation does not imply causality.

Re US/China tariffs, every country or trading bloc seeks to use existing circumstances to its own advantage in greater or less, unspoken or explicit, competition with others. There's no question that China has steadily and deliberately taken advantage of the existing order to gain (by every means possible) every technological advantage available, and so industrialise and lift its population out of poverty and into new wealth.

What country wouldn't do the same? But in China's case, because of its scale, because of its single-minded economic and political determination, this process looks likely to overturn the - largely Western contrived - order that allowed this process.

The larger issue is to examine the circumstances - Western contrived - that are complicit in China's rise (and China's rise is of crucial global importance as its political philosophy is incompatible with Western ideas of individual freedom, as well as much of the existing global order - maritime and property law etc etc). The circumstances that China has taken advantage of are based squarely in the West's desire for ever-cheaper sources of production, and access to new, enormous and newly enriched markets. These economic drivers are of their own accord hollowing out much of the Western middle and working class. More lately too, as here, Western countries have sought to gain direct Chinese investment.

As long as Western industry and finance want things ever cheaper and ever larger, need ever-increasing growth in the economic system, and need increased foreign investment to prosper or survive, China stands to profit. And it intends to profit.

Trump's tariffs are merely a few stubby fingers in the dyke.

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