Capital Markets: "Trump's Tariff Tweets Help Investors Discover Volatility "
From Marc to Market:
Overview: Reports that a US-China deal could be struck by May 10 before the weekend left investors ill-prepared for the presidential tweets yesterday that announced that the US was ending the tariff truce. Trump indicated that the 10% tariff on $200 bln of Chinese goods would be lifted to 25% at the end of the week and that the remaining $325 bln of Chinese goods that have not been subject to an extra levy, will be slapped with a 25% tariff soon. Some projections suggest that such a tariff regime would take as much as 1.5% off China's GDP and around half as much from US GDP. Stocks tanked.
The Shanghai Composite fell 5.6% while Shenzhen bled 7.4%. In Singapore, the entrepot, shares fell 3%. European shares trended lower all morning, leaving the Dow Jones Stoxx 600 off more than 1.3%, for its biggest drop in three months. The S&P 500 is called almost 1.75% lower. Bond yields are lower. Australian bonds, where the central bank meets later this week, saw yields tumble five basis points as did China's 10-year benchmark yield following a targeted cut in required reserves for small banks. European bonds yields were one-two basis points lower, with Italian bonds being the exception. The dollar is stronger against most major and emerging market currencies. The Japanese yen is the chief exception, though local markets will not re-open until tomorrow.
Asia Pacific
The US tariff threat is the main news, and it rocked the region, which had seemed like the laggard, especially recently as EMU's Q1 GDP surprised on the upside. South Korea's GDP contracted in Q1, and Taiwan's had slowed. While South Korea's manufacturing PMI rebounded back above 50 in April, Taiwan's fell deeper below 50. South Korea's export orders were at nine-month lows. Singapore's April PMI stood at 47.3, and its non-oil exports had dropped nearly 12% in March. The market was more inclined to see New Zealand cut rates than Australia, escalating US-China tensions may push the RBA over the edge, and the odds have risen.
There have been conflicting press reports about how China will respond. The first issue is whether China's negotiating team, some 100 strong, led by Vice Premier Liu He, will still come to Washington as planned by the middle of the week. Chinese officials reportedly were blindsided by Trump's tweets. There is also some thought that US industry may need more than a week to prepare for the hike in tariffs. The targeted required reserve ratio reduction for small Chinese banks is estimated to inject about CNY280 bln (~$40 bln+).
US economic adviser Kudlow played up the chances of a US-Japanese trade agreement by the end of the month. The heightened tensions with China may make the US more willing to secure its other markets. However, what seems more likely is that the US wants Japan to grant the same terms for agriculture as it granted to others under TPP and the free-trade agreement with the EU. Trump has a trip to Japan planned toward the end of the month that could provide such an opportunity to sign a deal. Japan, however, has gently pushed back. It does not want a quick deal that will be followed by a longer negotiation. It wants a comprehensive deal now, and it does not wish to be subject to US auto tariffs, which Trump threatens. It wants the steel and aluminum tariffs that have been levied on national security grounds to be lifted....
