Volatile Markets On Edge As Trade War Begins Amid Confusion

"Clearly the first salvos have been exchanged and in that sense, the trade war has started. There is no obvious end to this"  - Louis Kuijs, chief Asia economist at Oxford Economics.

The "largest-scale trade war in economic history" (as defined by China) launched at midnight, when the US announced $34 billion in tariffs on Chinese exports, and... confusion followed.

Duties on Chinese goods started just after midnight, or at 12:01 a.m. Friday in Washington, and just after midday in China. Another $16 billion of goods could follow in two weeks, Trump earlier told reporters aboard Air Force one, before suggesting the final total could eventually reach $550 billion, a figure that exceeds all of U.S. goods imports from China in 2017.

As we noted earlier, while China vowed to respond with countermeasures to the "unfair" US tariffs, no explicit announcement of just how China would retaliate followed immediately. Adding to the confusion, state-owned news agency Xinhua reported that China’s tariff actions in response took effect at 12:01 pm, however here too there was no detail, and the result was a spike in risk, as traders assumed that China was perhaps willing to concede early on without an explicit response.

To be sure, a token statement from the Chinese Commerce Ministry followed, with verbiage recycled from recent announcements:

“The United States has violated WTO rules and ignited the largest trade war in economic history. Such tariffs are typical trade bullying, and this action threatens global supply chains and value chains, stalls the global economic recovery, triggers global market turmoil, and will hurt more innocent multinational companies, enterprises and consumers.”

But it wouldn't be until a little after 3am EDT, during the press conference by Chinese foreign ministry spokesman Lu Kang, that China specifically laid out how China would respond. In the Beijing press conference, he called the US move "typical trade bullying" and noted that any side’s “hegemonic actions" in trade will not succeed, in response to questions about whether China and U.S. will hold talks. Some other highlights from his presser:

  • When asked about how much U.S. goods will be affected, Lu says it’s a question for relevant departments
  • China has been trying the best to help relevant parties understand the globalization objectively and to deal with trade issues rationally since March, Lu says
  • U.S. tariff actions openly violate WTO rules and trigger global market turbulence: Lu
  • China is confident to uphold multilateral and free trade system with other countries, Lu says

But most importantly, he said that China’s countermeasures took effect immediately after "unfair" U.S. tariff actions came into force, as Xinhua trolled Trump in a tweet, saying that "Battling with the world over trade, Trump seems to be making America ALONE again."

Xinhua then also clarified that the list of products China will hit with the 25 percent tariff won't change from what was put out in mid-June: some 545 products including soybeans and a bunch of other farm products, plus cars and crude oil, but mostly agriculture products:

  • Soybeans - which are used to feed pigs in China, the world's biggest pork producer
  • Corn - same, used as animal feed
  • Wheat - China is the world's top wheat consumer
  • Beef - U.S. exports to China only started again in 2017 after being banned for years because of mad cow disease
  • Sorghum - also used in animal feed

China also said that while it has promised not to "fire the first shot," it would now be forced to "counterattack" in order to defend its core interests. It has vowed to inform the World Trade Organization (WTO) and work with other countries to “jointly safeguard free trade and the multilateral system.”

“Our view is that trade war is never a solution,” Chinese Premier Li Keqiang told reporters in the Bulgarian capital Sofia, after meeting his counterpart. “No one will emerge as a winner from trade war, it benefits no one.”

Meanwhile, PBoC adviser Ma Jun said impact of US-China trade war is limited and expects the $50BN in US tariffs to slow
down China's growth by 0.2 ppts, while there were also comments from China Foreign Minister Wang Yi that China and EU should safeguard free trade and that China is willing to defend Iran accord with Europe.

These clarifications appeared to break the back of the modest bullish tone that had developed in response to the widely telegraphed and priced in trade war announcement, resulting in renewed selling in both China and the US: as shown below, while the Shanghai Composite initially dropped to a fresh 2016 low, sliding as much as 1.57% and below 2,700, it then rebounded sharply, only to fade gains and close 0.49% higher after a rollercoaster session .

A similar confused reaction was observed in the offshore yuan, which initially tumbled, then erased all losses and even turned briefly green for the day, before trading modestly in the red as US traders walked in to their desks.

Meanwhile, US equity futures saw the initial mini-spike fizzle, and were trading modestly in the red at publication time.

European stocks similarly trimmed gains and U.S. equity-index futures fluctuated after China provided the details of its retaliation. The Stoxx Europe 600 Index climbed 0.1% as of 10:14 a.m. London time, the highest in two weeks. Defensive stocks including household goods and utilities were among the gainers in the Stoxx Europe 600 Index, while carmakers and miners fell, confirming that traders were especially concerned about sectors targeted by China: as a reminder, China's new tariffs will deal a big blow to German automakers, like BMW and Daimler which are fighting a number of battles in addition to trade tensions.

One of the sectors hit hard was Europe's bank which initially spiked higher, only to lose all gains as the session progressed.


In a mini sideshow development, Deutsche Bank rose on a WiWo report that China's ICBC and JPMorgan are takeover bids; however JPM promptly denied the rumor just before 6am. The denial however did not faze traders who have sent DB stock 5% higher on the session.

Overall, there has been a relatively limited reaction to the official start of the trade conflict, which however had been well-telegraphed in advance. As an aside, if one looks at how stocks have performed since the start of trade war tensions, the US is clearly winning, if only for the time being.

What happens next, nobody really knows: as Bloomberg notes, the riskiest economic gamble of Trump’s presidency could spread as it enters a new and dangerous phase by imposing direct costs on companies and consumers globally. It’s the first time the U.S. has imposed tariffs aimed just at Chinese goods and follows months of accusations that Beijing stole American intellectual property and unfairly swelled America’s trade deficit.

Meanwhile, adding to today's confused trade, in just under 2 hours, the BLS will release the June jobs numbers, after the ADP released disappointing numbers on Thursday (a full preview is here).

“The usually highly anticipated report comes as trade tensions intensify between the U.S. and Chinese and are about to step up a gear, so the Labor Department’s report may not attract as much attention as normal,”  Jasper Lawler, head of research at London Capital Group Ltd. said in a note. “This does not mean that the report will be less likely to cause volatility in the dollar.”

Treasuries were unchanged, stuck to 2.83% and grinding ever lower. The Bloomberg Dollar Spot Index fell for a fourth day and was set for a weekly decline. The pound gained above $1.32 Friday following a report that ex-Prime Minister David Cameron had intervened to urge Foreign Secretary Boris Johnson to accept May’s proposals.

Commodities are mostly lower with WTI (-0.1%) and Brent (-0.3%) pressured amid yesterday’s surprise build in crude inventories fused with nervous trading as US-Sino trade war looms. Gold (-0.2%) is experiencing cautious trade ahead of the key US NFP due later today. Elsewhere, London copper (-0.1%, -5% this week) is set for the worst week since November 2015, down a fifth consecutive session as US tariffs kick in.

Looking ahead, highlights include US NFP, US trade, Canadian jobs, Baker Hughes

Market Snapshot

  • S&P 500 futures little changed at 2738
  • STOXX Europe 600 up 0.3% to 382.69
  • MXAP up 0.6% to 163.58
  • MXAPJ up 0.4% to 532.10
  • Nikkei up 1.1% to 21,788.14
  • Topix up 0.9% to 1,691.54
  • Hang Seng Index up 0.5% to 28,315.62
  • Shanghai Composite up 0.5% to 2,747.23
  • Sensex up 0.6% to 35,770.54
  • Australia S&P/ASX 200 up 0.9% to 6,272.29
  • Kospi up 0.7% to 2,272.87
  • German 10Y yield rose 0.3 bps to 0.302%
  • Euro up 0.2% to $1.1713
  • Brent Futures down 0.2% to $77.22/bbl
  • Italian 10Y yield rose 7.4 bps to 2.462%
  • Spanish 10Y yield fell 1.1 bps to 1.318%
  • Brent Futures down 0.2% to $77.22/bbl
  • Gold spot down 0.2% to $1,255.94
  • U.S. Dollar Index down 0.1% to 94.27

Top Overnight News

  • China said its retaliatory tariffs are now in effect to counter Trump’s measures, and argued it had been forced to act Impact of U.S. tariffs on $50b of Chinese goods to have “limited” impact on the economy, PBOC adviser Ma Jun says in comments distributed to reporters over WeChat
  • U.S. companies for months bemoaned the tariffs on Chinese imports that will take effect Friday. Now they fear the worst is yet to come in an escalating confrontation with Beijing over trade
  • Federal Reserve officials said a “very strong” economy warranted continued increases in their benchmark policy rate while citing an escalating trade war and emerging-market turmoil as risks to growth
  • Deutsche Bank: recent fall in valuation has drawn interest from JPMorgan and ICBC accoring to people familiar: Wirtschaftswoche
  • Prime Minister Theresa May is facing a decisive battle with her cabinet over the U.K.’s future ties to the European Union, in a showdown that threatens to throw Brexit talks into disarray
  • Saudi Arabia cut pricing for most of its oil grades as the world’s biggest crude exporter is increasing production to assure buyers there is sufficient supply following U.S. President Donald Trump’s demands that OPEC do more to stabilize oil markets
  • German industrial production picked up in May, signaling that the economy is beginning to stabilize after a stumble earlier in the year
  • While trade tensions intensify, Germany’s carmakers are fighting on an unprecedented number of fronts. While a tit-for- tat trade war move will hurt BMW AG and Daimler AG the most, the industry also has to also deal with record spending required for electric cars to keep up with emissions regulation, competitors from China and the tech industry

Asian stocks traded higher after the positive momentum from Wall St’s best performance in over a month followed through to Asia. ASX 200 (+0.9%) and Nikkei 225 (+1.1%) were positive as both indices took impetus from their US counterparts, in which the mining sector led the gains in Australia and the prior day’s currency weakness provided some encouragement to Japanese exporters. Conversely, Hang Seng (+0.5%) initially weakened and Shanghai Comp. (+0.5%) briefly fell below the 2700 level for the first time since March 2016 amid the tit-for-tat tariffs and after PBoC inaction amounted to a considerable CNY 500bln net drain for the week before the indices finished in the green. The KOSPI (+0.7%) was also subdued with index heavyweight Samsung Electronics dampened on disappointing preliminary Q2 results, while Singapore Straits Times Index (-2.0%) slumped from the open with developers hit by a surprise announcement yesterday of higher stamp duty rates and tighter loan-to-value limits as part of measures to cool the property market. Finally, 10yr JGBs have seen mild support overnight amid the overall cautious tone in the Asia-Pac region and BoJ’s presence in the market for JPY 810bln in JGBs, but with upside capped by resistance around the 151.00 level.
PBoC skipped open market operations for a net weekly drain of CNY 500bln vs. last week's CNY 370bln net drain. PBoC set CNY mid-point at 6.6336 (Prev. 6.6180)

Top Asian News

  • Xiaomi Falls in Gray Market Before H.K. Debut: Bright Smart Sec.
  • Musk: SpaceX, Boring Co. Engineers Heading to Thailand Tomorrow
  • Chinese Stocks Struggle to Hold on to Rally as Tariffs Begin
  • Janus Henderson Seeks Sales Team Head as It Expands in Asia

European equities trade higher (Eurostoxx 50 +0.2%) while investors monitor the ongoing trade disputes amid US moving forward with tariffs targeting USD 34bln of Chinese goods. Shortly after, the Chinese Foreign Ministry said tariffs have been implemented on some US goods. Energy names lag on softer oil prices. In terms of individual stock movers, Deutsche Bank (+5.0%) shares were lifted by reports JP Morgan and ICBC are to take a stake in the company, JP Morgan have denied these reports, however. Thyssenkrupp (+2.8%) also rests at the top of the German benchmark following the resignation of their CEO after he came under heavy criticism from shareholders.

Top European News

  • Irish Banks Face Increased Capital Demand Decade After Crash
  • U.K. House Prices ‘Broadly Flat’ Amid Shortage of Properties
  • Rolls- Royce Offloads Problem Marine Arm to Norway’s Kongsberg
  • Econocom Drops Most on Record as Leasing Delays Prompt Warning

In FX, the Dollar remains on the back foot amidst the first roll out of reciprocal import tariffs by the US and China, but also eyeing the official monthly BLS report with several anecdotal releases in the run up suggesting moderate downside  risk vs consensus for the headline payroll number. The DXY is near recent lows around 94.200 as a result, but likely to be more responsive to average earnings once the initial reaction to jobs, back revisions and the unemployment rate. EUR/GBP - Both maintaining momentum vs the Buck, with the single currency back above 1.1700, but still wary of decent (1.7 bn) option expiry interest at the strike and Cable looking at 1.3250 again as attention away from NFP is trained on Chequers and the latest Brexit ‘make or break’ meeting. CHF/JPY/CAD - All treading tight lines vs the Usd, with the Franc meandering between 0.9915-45, Jpy trapped within a 110.55-80 range and Loonie locked in 1.3120-50 parameters in the run up to Canadian jobs data, and the BoC policy meet next week.

Commodities are mostly lower with WTI (-0.1%) and Brent (-0.3%) pressured amid yesterday’s surprise build in crude inventories fused with nervous trading as US-Sino trade war looms. Gold (-0.2%) is experiencing cautious trade ahead of the key US NFP due later today. Elsewhere, London copper (-0.1%, -5% this week) is set for the worst week since November 2015, down a fifth consecutive session as US tariffs kick in.

Looking at the day ahead, the June employment report in the US is the data highlight including of course the latest payrolls and average hourly earnings data. We will also get May industrial production in Germany along with the May trade balance and current account balance in France and Q1 unit labor costs in the UK. Aside from the data, the ECB's Nouy and the EU's Dombrovskis will be speaking at Central Bank of Austria's annual conference.

US Event Calendar

  • 8:30am: Trade Balance, est. $43.7b deficit, prior $46.2b deficit
  • 8:30am: Change in Nonfarm Payrolls, est. 195,000, prior 223,000
    • Unemployment Rate, est. 3.8%, prior 3.8%
    • Average Hourly Earnings MoM, est. 0.3%, prior 0.3%
    • Average Hourly Earnings YoY, est. 2.8%, prior 2.7%
    • Average Weekly Hours All Employees, est. 34.5, prior 34.5
    • Labor Force Participation Rate, est. 62.7%, prior 62.7%

DB's Jim Reid concludes the overnight wrap

A word of warning. If you’re going to a wedding that starts around 3pm tomorrow in England or Sweden be prepared to stand in for the Groom or Bride if they're a football fan as they may see jilting their spouse as preferable to missing the big game. It’s truly a game where “the winner takes it all”. I haven’t read the tabloid papers in the UK today but I’m predicting that someone will use “Come and ABBA go if you think your hard enough” as their front page! Finally spare a thought for Craig on my team who tomorrow has his stag do in Scotland. He may not find many places to watch the game with a sympathetic crowd.

Sticking with the ABBA theme it’s a case this morning of “Gimme, gimme, gimme a tariff after midnight” as we we’re now an hour past the 00.01am ET scheduled US imposition of tariffs on $34bn of Chinese goods. Earlier on, Bloomberg reported that China’s Ministry of Commerce will be forced to retaliate on US tariffs, but have not specified a time frame yet. There is no official word yet from China as we go to print this morning. Before the US tariffs took effect, Reuters reported that President Trump told reporters on board Air Force one that subsequent rounds of tariffs could be applied on $550bn worth of Chinese goods.

This morning in Asia, markets are recovering from earlier session lows, with the Nikkei (+1.04%) and Kospi (+0.18%) both up while the Hang Seng (-0.48%), and Shanghai Comp. (-0.34%) are modestly down. Datawise, Japan’s May labour cash earnings grew at the fastest monthly rate in c20 years, at 2.1% yoy (vs. 0.9% expected). Meanwhile in Germany, Chancellor Merkel’s third coalition partner (the SPD) has now endorsed her migration plans.

Ironically on this morning of escalation, yesterday saw European automakers having their best day in 2 years after the story yesterday that German autoindustry executives met with U.S. Ambassador to Germany Richard Grenell on Wednesday where the latter was said to suggest that Washington was prepared to discuss a zero car duty regime. The Stoxx 600 Automobiles & Parts Index rose 3.41% percent with BMW (+1.70%), Fiat Chrysler (+5.98%), and VW (+3. 24%) all strong.

Staying with autos, after Europe closed Politico reported that the EU may offer to negotiate a plurilateral trade deal that would eliminate most tariffs on autos to persuade President Trump to avoid a trade conflict with the EU. The paper noted the proposal has the backing from Germany and the EC President Juncker could present the proposal to the US later in the month. Notably an unnamed official said the deal would have to cover c90% of global car exports to meet WTO rules, but DB’s George Saravelos noted that it should be relatively easy for other countries to sign up because their tariffs are already near zero. So it is a path for the EU to claim they have agreed to a multilateral deal under WTO rules when in practice it could be more of a negotiated bilateral tariffs with the US. Further, an unnamed WTO official said they have not been briefed on the proposal, but the “concept would be possible”. Meanwhile German Chancellor Merkel seems to back the idea of lower car tariffs too as she noted “talks on…reducing tariffs, for which I’m prepared, can’t only be done with the US….we’ve to do it with all countries with which we have trade in automobiles…”.

The highlight outside of trade today will be US payrolls. The consensus for June is 195k (with a high to low range of 154-242k) which compares to the above market 223k in May. The bigger focus, average hourly earnings, are expected to come in at +0.3% mom (DB agrees) which, if it holds, would push the annual rate up one-tenth to +2.8% yoy and match the post-recession high made in September last year. Our US economists are close to the consensus with a 190k projection for payrolls and their expectation is that this should be enough to keep the unemployment rate at 3.8%.  Yesterday’s ADP didn’t really do anything to sway that view with the 177k reading pretty much as expected by our economists.

As markets yesterday. US equities rebounded c1% on thin volume as trading resumed post holidays (S&P +0.86%; Nasdaq +1.12%). Within the S&P, only the energy sector was slightly down while gains were led by tech stocks as Facebook (+2.97%) and chipmaker Micron Technology (+2.64%) both rebounded and lifted sentiment as the latter clarified that the Chinese court’s sales ban on some of the company’s products would only impact c1% of its annual revenue. Back in Europe, all the bourses were higher as the DAX led the gains (+1.19%) given the boost from car maker stocks while the Stoxx 600 (+0.41%) and FTSE (+0.40%) also advanced.

This followed a confusing day of price action in European bonds with 10yr bunds selling off 4bps in the first couple of hours of trading as the previous night’s ECB story reverberated and strong data from Germany came through. However it reversed all these gains as the day progressed, most likely due to early weakness in Italy and possibly softness in Oil later on in the day. On Italy, 2 and 10yr yields were +16.9bps and +7.4bp higher respectively. Finance Minister Giovanni Tria was quoted earlier on Bloomberg as saying that the new government will have both tax cuts and a universal basic income in its first budget to prove it’s sticking to its agenda. Elsewhere in global bond markets, curves continue to flatten with US 2s10s down to a fresh decade low of 28bps and long dated core European yields are continuing to do well as chatter persists about ECB doing an equivalent of ‘operation twist’ with reinvestments once QE ends.

In FX, Sterling initially traded 0.3% higher following BOE Governor Carney’s slightly hawkish comments that “the incoming data have given me greater confidence that the softness in the UK activity in 1Q was largely due to the weather, not the economic climate”, but gains were erased and the currency closed -0.06% weaker as Bloomberg cited unnamed German government officials who noted the UK PM May’s latest plans (due to be discussed today) for a customs union post Brexit is unworkable. Meanwhile WTI oil fell -1.62%, in part as EIA data showed higher than expected US crude inventories.

Turning to the FOMC minutes which were largely in line with our US economists’ views. Fed officials acknowledged rising trade tensions but flagged the US economy is very strong. On rates, DB’s Brett Ryan noted the Fed remains on path to neutral rates and beyond given their forecasts, as the minutes indicated “participants generally judged that with the economy already very strong….it would be appropriate to continue gradually raising the …federal funds rate to a setting that was at or somewhat above their estimate of its longer run level by 2019 or 2020”. Notably some members did argued that “it might soon be appropriate to modify the language in the post-meeting statement indicating that the stance of monetary policy remains accommodative.'” Elsewhere, the flattening yield curve was a concern, as “a number of participants thought it would be important to continue to monitor the slope of the yield curve” but the minutes also indicated that the curve “…. would be only one among many considerations in forming an assessment of appropriate policy.” On trade tensions, “most (participants) noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects”. Further, “many district contacts expressed concerns” that the ongoing trade tensions was weighing on future investment activity. Finally on inflation, “a number” of participants noted it was “premature to conclude that the committee had achieved” its 2% inflation target on a sustainable basis.

Finally turning back to Brexit. Today sees the all-day cabinet meeting at the PM’s Chequers country residence where Mrs May and her cabinet will look to finalise their blueprint on the future relationship between the UK and EU post Brexit. Bloomberg reported that a group of seven pro-Brexit ministers met last night at Secretary of State for Foreign affairs Johnson’s office to coordinate their opposition to the PM’s policy on linking tariffs and goods regulations closely to those of the EU. Meanwhile, Bloomberg has also confirmed an earlier report by the Telegraph where the Brexit Secretary Davis has written to PM May to say her new proposal on the customs union will fail. So lots bubbling along before more details later today.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the June ISM non-manufacturing composite index was above market and rose 0.5pt to a four month high of 59.1 (vs. 58.3 expected). In the details, the activity index rose 2.6pts to 63.9 - the highest since August 2005, while the new orders index also jumped to a solid print of 63.2. Meanwhile the labour market cooled with the June weekly initial jobless claims (231k vs.  225k expected) and continuing claims (1739k vs. 1,718k expected) both slightly higher than expectations, but remaining at very low levels. The final readings of the June services PMI was confirmed at 56.5 while the composite PMI was revised up 0.2pt 56.2.

In Germany, the May factory orders was solid, up for the first time in five months and also above market at 2.6% mom (vs. 1.1% expected), leading to an annual growth of 4.4% yoy (vs. 1.7% expected). Excluding the impact of major  transport items, manufacturing orders still rose a solid 2.2% mom and 4.3% yoy.

Looking at the day ahead, the June employment report in the US is the data highlight including of course the latest payrolls and average hourly earnings data. We will also get May industrial production in Germany along with the May trade balance and current account balance in France and Q1 unit labor costs in the UK. Aside from the data, the ECB's Nouy and the EU's Dombrovskis will be speaking at Central Bank of Austria's annual conference.