Overview: The end of the tariff truce between the US and China has discombobulated investors. They had been repeatedly that a deal was close and there had even been talk at the US Treasury about where Trump and Xi should meet to sign the agreement. Now China was given around a month to capitulate to US demands or face a 25% tariff on their remaining exports to the US. The lack of an immediate formal response (retaliation) by China and indications that talks will resume at some point, helped the S&P 500 reverse higher ahead of the weekend, but a pessimistic reading of events dominates today and equities markets are tumbling again. MSCI Asia Pacific Index lost 3.6% last week, and most of the major markets (Shanghai, South Korea, Taiwan, and Singapore) were off over 1% today. Europe's Dow Jones Stoxx 600 fell around 0.7% in the morning session after its shed 3.4% last week. The S&P 500 slid 2.2% last week and is off around 1.25% in electronic trading. Bonds are rallying. The US 10-year yield is off five basis points to just above 2.40%. The low from the end of March was about 2.33%. The benchmark 10-year German Bund is off a few basis points ( ~minus 6 bp) to push its yield below the 10-year JGB. Italian and Greek bonds are exceptions to the push lower in yields. The dollar enjoys a firmer bias against most of the world's currencies today. The Japanese yen and Swiss franc are proving most resilient, while among the majors the dollar and Scandi blocks are the heaviest. Declines in the Turkish lira and South African rand are pacing the emerging market currency decline.
Asia Pacific
China has not specified its retaliatory measures, and most observers seem to still be expecting a formal announcement in near-term, though we are less convinced. On the one hand, the US (and many outside observers) have been critical of China for the apparent lack of the rule of law. Yet, somehow, the reluctance of China to change its laws (when the Trump Administration is seeking an executive agreement, which is a weak form in the US) was the supposed trigger for the collapse. It appears China insisted that all Trump tariffs are lifted with the agreement and this was not acceptable to the US. Note that Mexico and Canada are demanding along similar lines that the steel and aluminum tariffs are lifted before the parliaments approve the new NAFTA deal.
The process by which the US can impose a 25% tariff on the remainder of Chinese goods takes several weeks. Details expected later today. China was given a month to reach an agreement. No new meetings have been announced. Since the last meeting was in the US, Lighthizer and Mnuchin have been invited to Beijing with no specific date reported. However, as economic adviser, Kudlow was admitting on television yesterday that indeed American businesses and consumers pay the tariff, he also pointed to the G20 meeting at the end of next month in Japan as a potential meeting between Trump and Xi. Initially, the meeting was touted as a venue to sign the agreement, and now it may be needed to overcome the deadlock. Separately, some suspect that Kudlow's contradiction of Trump's claim that China is paying for the tariff is a sign that he may leave the administration this summer.Meanwhile, support for Japan's Prime Minister Abe has risen according to the latest polls....
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