Global rebound holds after measured retaliation

Summary

Beijing’s targeted retaliation, with hints of concessions, keeps damage to the global share rebound contained.

Measured retaliation

European stock market resolve is mostly holding after China breaks the suspense and unveils nuanced retaliation on $60bn in U.S. imports. Wall Street’s positive open also breaks the long-held pattern of U.S. shares taking the lead in global sentiment. It was Shanghai and Shenzhen shares that called an early halt to anxious selling. The new raft of duties from Beijing implies major concessions, though the complete list of 5,207 U.S. goods impacted (unchanged from earlier proposals) had yet to arrive at last check. Highlights include several instances where initially announced duties have been reduced. The obvious stand out is the cut of new tariffs on U.S. liquid natural gas to 25% versus 10% initially mooted. In a sense, it’s little surprise Beijing goes has gone for ‘measured’ over ‘aggressive’. It has consistently argued for restraint whilst aiming for higher ground, hoping Washington will be seen as vacating that position. Beijing is also still considering whether to send a top commerce minister to Washington for talks recently mooted by Treasury Secretary Mnuchin. In recent days, China suggested it might not participate. If it does after all, the partial aim would be conciliatory optics that may serve it well in broader diplomacy.

Yuan sellers hold off

Beijing has parried new duties adroitly in markets too. The People’s Bank of China quietly added some $29.2bn worth of short term yuan bank funding for banks via reverse auctions early in European hours. That followed a new medium-term yuan lending facility was opened a day earlier worth $38.6bn. The backdrop is local newspaper speculation that the PBOC may cut required reserve ratios again next month. As well, the yuan continues to – in effect – shave harsh edges off tariffs. The offshore rate earlier threatened to fall below the crucial ¥6.89 to the dollar. Dollar resistance is visible to the naked eye at that rate and traders are wary of aggressive selling there. With ample non-currency PBOC concessions this week, there’s a good chance the central bank will not tolerate a fall that far so soon. But a clear chain of lower highs suggests the pause may not last. Renminbi’s levers on EMFX means CNY’s controlled relapse complicates FX rebounds in Argentina, South Africa, Russia and more. Rates are holding up fairly well for now, though Turkey’s lira has been a clear lightening rod. USD/TRY jumped to within 1.3% of a low close to the CBRT’s massive hike last week. After confident cross-asset sentiment wanes, yuan and lira suggest further EMFX volatility will return to currencies linked to deep current account deficits in the near term.

China may stick to tariffs for now

A Lack of clarity about Beijing’s course of action is the main challenge to risk appetite from here on. (With higher duties on $170bn of U.S. imports so far this year, China has now raised new taxes on pretty much all trade with the States.) Logically, targeted official measures against U.S. industries in China could move to the centre of the conflict. The Foreign Ministry there accused Washington of introducing “new uncertainty” earlier. Yet Beijing’s consistent admonishing tone towards its chief trading partner and evident desire to project a conspicuously measured attitude suggests China will not move beyond tariffs for now. However, relief within the dominant U.S. technology sector—Nasdaq 100—rising the most among U.S./EU markets just now—may have limits as investors prepare for possible expansion of the dispute beyond trade taxes in the near term.