Trump threatens tariffs on all US-China imports; markets react; Fitch warns; G20 seethes; shadow banks rush for Aussie opportunities; UST 10yr 2.89%; oil up, gold up; NZ$1 = 68.2 USc; TWI-5 = 71.5

Here's our summary of key events overnight that affect New Zealand, with news of unintended consequences for know-it-alls everywhere.

In a CNBC interview, the US President threatened to impose tariffs on all Chinese imports, a US$½ tln annual trade. That sent the US currency lower against most countries as some key companies recoiled, but sent the Chinese yuan even lower of course effectively making Chinese imports cheaper right now. It also sent Wall Street lower overriding the impact of corporate earnings reports some of which were 'bumper'.

The impact even spread to US Treasury yields. They jumped to 2.89% as market now see inflation zooming, Maybe some of that is because Russia is selling its UST assets. - although it is just a minor holder.

Ratings agency Fitch is warning that US capex spending will fall the longer and deeper the tariff escalation gets.

The folly of governments picking winners and losers is on full display here, along with an object lesson in basic economics over tariffs and "comparative advantage". High school economics is likey to win.

With trade conflicts brewing around the world, this weekend’s G20 meeting of finance ministers in Argentina is underway. Hostility to the US is likely to be on full display.

We will need to wait until Monday to get an impact today's events have on Far East equity markets.

In Canada, inflation is on the rise. It was up to +2.5% in June, a jump from +2.2% in May and higher than analysts were expecting. The June increase was its highest in six years. The Canadian currency rose on the news as did expectations of interest rate hikes.

In an interesting twist, the regulator-induced push to have Australia's regulated banks reduce their exposure to multi-unit housing projects, the gap has been quickly filled by shadow banks and especially foreign financing. The effect has been to increase foreign debt - and its systemic financial risks. That is because the funding is essentially now from unregulated non-ADIs. This is surely the start of unintended consequences of aggressive regulator actions who assume they know banking.

And speaking of unintended consequences, there is this from dystopian China.

The UST 10yr yield has jumped today at the market close to 2.89% and and up +4 bps from yesterday. Their 2-10 curve has widened suddenly to +29 bps. The Chinese 10yr is at 3.51% (up +4 bps from yesterday) while the New Zealand equivalent is now at 2.82%, down -1 bp after its chunky rise yesterday.

Interestingly, the VIX is generally little changed at 12.9 and that is only just slightly higher than this time last week. The average index level over the past year is 12. The Fear & Greed index has is still at a neutral level.

Gold has jumped +US$7 from yesterday and now a just over US$1,231/oz in New York.

US oil prices are up today from yesterday and now just over US$71/bbl. The Brent benchmark is now just over US$73/bbl. The US rig count has fallen by -8 this week although it is up almost +100 in the year. Fracking shale formations may be an American success story, but the technology is being turned to other markets, and believe it or not the largest one for gas is in China. And elsewhere the oil majors are preparing for a new investment spurt.

The Kiwi dollar is ending the week sharply higher at 68.2 USc, a gain of more than +¾c after the Trump interview. On the cross rates however we are little changed from yesterday at 91.8 AUc, and at 58.1 euro cents. That puts the TWI-5 at 71.5.

Bitcoin is now at US$7,334 which is down -2% from yesterday, but up nearly +20% over the past week.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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26 Comments

Please remember, the matters that can be commented on in this story can be relatively wide. But please ensure they have a passing relationship to the New Zealand economy and the influences on it.

I want to clean out the culture wars commentary and comment, especially the stuff that has no relationship the items in this daily review, no relationship to New Zealand (and especially the stuff that tries to import the ethnic and nationalistic tensions of other, far-away places).

If such irrelevant (that is irrelevant to interest.co.nz) comments just disappear from these threads in future, this is the reason. There are plenty of other websites where you can have those arguments and push those barrows, just not on interest.co.nz - please.

Comments on all other stories should relate to the subject of the story.

Totally supportive of your stance David and one that is needed to maintain the credibility of the high standards of interest.co and its articles.

Generally supportive of your stance. With one in four Kiwis born overseas and the remaing three likely to be the children of immigrants and/or very well travelled (OE is an almost NZ unique term) you must expect ethnic and nationalist comments and they can often be most informative. But they are also often crap. Probably the best way of distinguishing them is fact -v- opinion content and is the commentator condemning or praising his own or other nations.
The NZ economy is highly influenced by Australia, USA and China and once was influenced by UK - any reasonable discussion is likely to mention them. If you keep the reasonable and kill the prejudice I'll be happy.

I look forward to you cleaning up the comments. This site is a fantastic place to keep up with current global financial economics and it is a shame to read some of the banter on this site, as it gets way too personal at times.

Trump is getting worse, if that is possible! A lying, egotistical moron!

Im not supportive of trump, but weird that other nations can do the same things discreetly, but get away

Comparative Advantage? Sure. So what is it that China makes ( and "will be more expensive for US consumers if they have a tariff added!") that other countries don't make and can be sold into the USA - not to mention the USA replacing Chinese exports with manufacturers of their own?
Ricardo may have something going for it 2 centuries ago when trade was relatively narrow and took ages ( ships) to enact. Today? It's a mass of choice for the same 'stuff' and is available, online; delivered tomorrow....
(NB: Let's remember that Trump want NO tariffs by anyone on anybody; no subsidies to support local enterprise etc, and if that was in play, none of this Trade War would be going on)

Well he got the votes and thats the way things go. The USA is going through a revolution at the ballot box, it's how it goes in a democracy, he's the symptom of a deeply dysfunctional, unfair and divided economy.
Personally I respect the peoples decision, it's not a choice I have, Trump just is what he is and I suspect if they had another election tomorrow he would do even better.
Even around my neck of the woods we have poverty the likes I have never seen before in NZ.

I guess you have to question why those in poverty would vote republican though. At least with Democrats they would have some form of healthcare. It’s a pretty unlikely trump will be able to bring enough jobs back to the US to help much, and their unemployment rate isn’t that bad anyway.

Obamacare was unpopular

Trump has said himself, that at heart, his personal views are more aligned with the Democratic Party view, but there was alot of corruption going on there, so I guess he is trying to clean house a bit. And there will be a bit of carnage along the way, but hopefully he will eventually get his country back on track. It surely couldn't get any worse for the american people.

Writing in The American Conservative, Harry J. Kazianis ably sums up our problems with the Chinese:

If projections hold, the Chinese economy will someday surpass America’s and Russia’s—combined. As economic power translates into clear military strength, the writing could be on the wall for what may come.

Take, for example, America’s overall strategic outlook today. Washington faces from Beijing a clear and present danger that seeks to largely overturn the international system in its favor. No longer close partners thanks to the end of the Cold War, what replaced those fears and kept the relationship viable—a budding economic and financial partnership—is being blown to bits with each passing day. Thanks to Chinese theft of intellectual property, a massive trade deficit that has caused millions of jobs to flee from America to China, and the theft of perhaps trillions of dollars and military secrets, Beijing is quickly becoming Washington’s mortal foe.

Furthermore, says Kazianis,

America and China have a long-running rap sheet of geopolitical problems that at any moment could cause a spike in tensions and possibly an armed conflict in the future. From the East and South China Seas to Taiwan, the fate of which controls Asia’s commons and waterways and straits, both nations seem set to face off over who will not only dominate Asia, but the much larger Indo-Pacific region.

Hence Obama's "pivot to Asia". Methinks the present president is trying to do to China what Reagan is credited with doing to the USSR. The whole China being allowed to trade/steal knowledge from the West goes back to Nixon's deal with China, whereby he neutralised China's involvement in the Cold War between America and the USSR. The US is primarily a self sufficient military power that became a worldwide financial power after taking over that role from Britain.

Interestingly, Britain is still a major financial and military power, and Brexit may be a consequence of this.

Seriously, who is scared of Britain's military power?

This global ranking puts Britain at number 6, in terms of Forex they are number 1, so not as weak and pathetic as they think:
https://www.globalfirepower.com/countries-listing.asp

I don't deny they have military and spend plenty on it and have some effective forces. My query is of the 200 odd countries in the world how many are worried about UK military strength? Maybe Argentina? Does Syria or Libya worry if the UK threatens them - not in the least unless as part of a force assembled by USA or EU or Nato or UN. The govt of Nuie may worry about NZ's military force and so may Fiji but neither are worried about UK military. Equivalent for the UK would be really mickey mouse pseudo-countries such Isle of Man or various Channel isles.

The Brits lost their position when they joined the EU. Germany controls them.

"If projections hold" - so checking world bank growth rates Libya and Ethopia overtake everyone else. This is like the London under 2 metres of horse shit prediction made in 1880.
The author and most of USA and NZ are worried about the sheer number of Chinese and the way they are all harnessed whether they like it or not to the Chinese Communist party. Meanwhile the Chinese are probably most scared of the example of Taiwan where the per capita wealth is double China starting from the same economic base with same people but without the same resources and zero international political clout. So long as the party can control the media they are OK - and now they are leaning on foreign (NZ) universities and newspapers to stop the message getting out that democracy and rule of law does work and does leave the people better off.

While I think Trump is awful, I get his concern on China. In many ways it is warranted. China has been up to a lot of dodgy stuff

The simple reason the PBOC was leaving the level of bank reserves to outright fall was because its asset side, the majority of China’s monetary base in forex especially “dollars”, was shrinking. In conventional terms, this is called capital “outflows” but that, too, is wrong. The word outflow implies that money leaves one place and therefore has to show up someplace else.

In the eurodollar world, this money leaves China (or Brazil) and is destroyed, obliterated by the keystroke of a bank accounting system (the technological successor to the bookkeeper’s pen, as Milton Friedman once observed of eurodollar creation). Why “dollars” are destroyed is every bit as important in July 2018 as it was in July 2008.

Not wishing to suffer further miscalculation and the potentially devastating economic effects from it, the Chinese central bank began 2016 “printing RMB.”
https://www.realclearmarkets.com/articles/2018/07/20/ten_years_later_the...

With increasing trade tensions,one can expect that the number of companies suspended on the Shenzhen and Shanghai stock markets to increase. The fall in commodity prices ,such as copper as noted prudently and eloquently on this website to year lows will at some point push over indebted and over pledged companies to look for temporary relief. Interestingly soy beans ,with prices hovering around 10 year lows are another commodity where the Chinese have gone on recent related buying sprees,(in line with recent policy settings )that should in due course start to put many companies under increasing financial strain.Dislaimer,this opinion is related to the weekend briefing ,unfortunately it is not about a house sale and may be deleted.

The economic significance of the tariffs has been hugely exaggerated: 25 per cent on US$34 billion is an extra US$8.5 billion. China’s exports are likely to top US$2.4 trillion in 2018. The tariff impact is therefore symbolic. Even the 10 per cent tariff on US$200 billion only amounts to an additional US$20 billion. The numbers are not big, in relative terms.
https://www.scmp.com/comment/insight-opinion/united-states/article/21560...

There is a widespread idea that zero tariffs are best. What if 5% tariffs are best? They might result in a more stable system by introducing a small amount of friction in the system. Or maybe just a toll on financial transactions would have the same effect. The benefit might be a second or third order one like more resilience or lower price volatility. I read somewhere that the main benefit of Sir Isaac Newton's British Gold Standard may have been that it led to stability in world interest rates over long periods of time and this was a major enabler of the industrial revolution a century and a half or so later.

I rather favour a small border tax on goods and services, like our internal GST.
The world is used to our experimental view of tarriffs and we would probabaly be ignored.
The mouse that roared...

If you read one thing.
https://www.smh.com.au/money/banking/why-good-people-do-bad-things-20180...

The New Zealand banks are Australian banks.
And here is how they have become the most profitable in the world!
Hint its not just their high IQ/EQ too!

I'm fond of saying how crazy things get near the end of Bubbles. Convinced this is History's Greatest Bubble, I've been anticipating a pretty astonishing variety of "crazy." Watching this all unfold with increasing trepidation, I sense an important line has been crossed. It's time to retire "crazy" - find a replacement that conjures up something more foreboding - more disturbing. And markets, well, they're seemingly fine with it all; at times almost giddy. And that's the fundamental problem: Dysfunctional markets continue to promote incredibly risky policy behavior - the polar (bear) opposite of imposing discipline.

The central banks' "slippery slope" has led us to an ominous place. "Strongmen" now believe it's within their domain to dictate the markets, interest rates and currency levels. All the while, it's regressed into an unprecedented global Bubble replete with a Global Financial Arms Race. Markets trade as if they fully expect all governments to absolutely, at all cost, safeguard their respective financial wealth (i.e. Bubbles). Remember "the West will never allow a Russian collapse"? And "Washington will never allow a housing bust"? Global policymakers will never allow another major crisis. Well, let's see how this game of chicken between President Trump and President/General Secretary Xi plays out.
http://creditbubblebulletin.blogspot.com/