The U.S – China Trade War – How Long is a Piece of String?

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Perhaps it wasn’t that surprising that the U.S and China failed to thrash out a trade agreement in a shortened set of meetings last week.

The U.S President has certainly taken to the airwaves to justify the trade war and latest series of decisions that are expected to also impact U.S consumers.

Interestingly, in spite of the lack of progress, the majors avoided a sharp sell-off on Friday, with the major European and U.S indexes ending the day in the green.

For the week, it was a different story, however, with both sides of the Pond seeing heavy losses.

For the likes of the EUR and the Dollar, the latest tariff hike could ultimately hurt the U.S economy more than that of the Eurozone. If U.S consumers begin to feel the pinch, a pullback in domestic consumption would be bad news for the economy.

Farmers are already complaining over the extended trade war and the impact on the sector in general. Once consumers begin to stamp their feet, there may be some incentive for Beijing to hold out until next year.

Short-term pain for long-term gain. Trump threatened China with significantly more punitive tariffs should an agreement not be in place well ahead of a possible 2nd term in office.

Trump is clearly expecting Beijing to buckle. After all, Trump’s prospects at a 2nd term would diminish should the U.S economy slide into a trade war-induced coma.

It’s anyone’s guess on whose gamble will pay off and whether Beijing will be able to provide the necessary stimulus to maintain growth through to the next presidential election.

There’s a long way to go, which suggests that dialogue will at least continue for now.

The Week Ahead

Late into the weekend, the news wires reported that China had reached out for talks to resume in China, following last week’s lack of progress.

While the U.S President will look to maintain his apparent position of strength, it would be fair to say that we’re now at a stage where neither party will likely benefit from prolonged tariffs.

The U.S is looking to influence Beijing into changing laws on intellectual property rights and more. Focus is not purely on rebalancing trade. It’s understandable why Beijing is digging in its heels. It’s even plausible that this may well be the deal breaker should the 2-sides agree on everything else.

We can expect market volatility to begin to pick up through the week. Particularly if there is no concrete plan to resume talks. China has extended the olive branch for now…

Volatility is expected to deliver more unease to an already jittery market. News of the U.S administration working on the next set of tariffs won’t help risk sentiment.

It’s all going to boil down to how China and the U.S interact this week. Trump certainly doesn’t need the global financial markets to go into meltdown mode. There’s not much point in telling the FED to cut rates. If you’re going to throw the kitchen sink at the 2nd largest economy, it’s going to do some damage…

This morning

While the FX world was somewhat steadier, the global equity markets were less optimistic.

At the time of writing, the Japanese Yen was up by 0.17% to ¥109.76 against the Greenback. The risk-off sentiment weighed on the commodity currencies early on. The Aussie and Kiwi Dollar were down by 0.37% and by 0.27% respectively. The Loonie fared slightly better, down by 0.15% to C$1.3437 against the U.S Dollar.

In the equity markets, the U.S majors look set for a tumble at the open. The Dow Mini was down by 258 points at the time of writing. The S&P500 and NASDAQ were also in the red, down by 30.25 points and 92.75 points respectively.

This article was originally posted on FX Empire


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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