China’s Trade Retaliation Rattles Global Markets

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Chinas trade retaliation

This post was originally published on Financial Times.

China’s planned retaliation to the string of tariffs imposed by the US hit global markets on Wednesday, knocking everything from German stocks to soyabeans, as the spectre of a trade war intensified.

Wall Street is poised to open sharply lower after Beijing announced it will impose tariffs on 106 US products ranging from soyabeans to cars. China’s move came less than 24 hours after the Trump administration said it would levy tariffs on 1,300 Chinese-made goods.

Just weeks after the stock market cheered Mr Trump for cutting corporate taxes, investors are quickly trying to calibrate how significant a threat the deterioration in US-China relations poses to the global economy. Analysts say it is one factor that has brought volatility back to a stock market that was unusually becalmed in 2017.

“A sharp initial sell-off in the industries most exposed to these products notwithstanding, investors will digest the news with more nuanced reaction as the measures evolve,” said Tai Hui, chief market strategist for Asia Pacific, JPMorgan Asset Management. “The largest concern remains whether this trade tension could further escalate.”

Shortly after the announcement on China’s CCTV, Germany’s Xetra Dax index — often viewed as a proxy for global trade because of its heavy weighting of exporters — fell more than 1.5 per cent. Beijing’s threat to impose tariffs on US automobiles sent the Euro Stoxx 600 Auto&Parts index down 1 per cent, with Milan-listed Fiat Chrysler Automobiles falling as much as 2.4 per cent.

After staging a bounce on Tuesday, futures suggest the equity market will fall on Wednesday with the S&P 500 poised to open 1.4 per cent lower and the Dow Jones Industrial Average set for a 1.8 per cent decline. Aeroplane maker Boeing was among the steepest fallers, with futures pointing to a 5 per cent tumble.

Away from equity markets, soyabeans were one of the most sharply affected as traders reacted to the surprise decision to target the soft commodity. The US farming sector relies heavily on soyabean sales to China — they account for almost 60 per cent of US agricultural exports to the country. Soyabeans fell as much as 4 per cent to below $10 a bushel, while corn declined more than 3 per cent and wheat slipped 2 per cent.

Emerging market currencies were also unsettled as investors shunned risk. South Africa’s rand and Turkey’s lira fell by about 0.7 per cent apiece against the dollar. There was also pressure on Russia’s rouble and Mexico’s peso.

The oil price was also swept up in the wider fears about what deepening trade tension mean for global growth. Brent crude, the international benchmark, fell $1.15 a barrel to $66.97 while US marker West Texas Intermediate declined $1.13 a barrel to $62.39.

Although the immediate reaction on Wednesday was fearful, investors and analysts said significant questions remained over whether China and the US will follow through with the decision to impose tariffs.

“History suggests negotiation is likely to follow, which would provide some much needed short-term relief to investors and allow them to focus back on economic and corporate fundamentals, which are still in decent shape,” said Mr Hui of JPMorgan Asset Management. “This Sino-US trade tension could go through several rounds in coming years.”

Beijing’s decision to impose tariffs on soyabeans is likely to hit Chinese buyers and consumers who will ultimately pay more for pork and chicken.

This post was originally published on Financial Times.