Trade tensions increase and global equities were down by 1.1% in the past week
Trade tensions intensified in the past week, with the US threatening to impose a 10% tariff on $200 bn worth of imports from China on top of the recently announced 25% tariff on $50bn of Chinese imports. The US also threatened to target a further $200 bn of Chinese imports (US total goods imports from China: $542 bn in 12-month sum terms) in the event China retaliates. Indeed, China has said it will retaliate through “comprehensive quantitative and qualitative measures”.
In view of the low value of goods imports from the US ($162 bn), Chinese retaliatory action could also involve targeting: i) services imports from the US ($59 bn): and/or ii) US-based companies operating in China. According to the latest data from the US Bureau of Economic Analysis, total sales in China by majority-owned foreign affiliates of US multi-national companies amounted to $356 bn in 2015.
At the same time, in order to avoid any over-tightening of financial conditions due to higher US rates and to stem potential negative effects on economic activity from trade disputes, the People’s Bank of China cut the Required Reserve Ratio by 0.5% (to 13.5%-15.5%) for a targeted group of banks, providing additional liquidity of RMB 700bn (0.9% of GDP) to the banking system.
Meanwhile, US President Trump also threatened the EU with tariffs of 20% on car imports (versus 2.5% currently). EU (passenger) car exports to the US amounted to €38.3 bn in 2017 (2% of total extra-EU exports), of which €21.7 bn came from Germany.
On the economic font, euro area PMIs improved in June (composite PMI: +0.7 pts to 54.8 | consensus: 53.9). Nevertheless, they remain consistent with the view that the economy has shifted to a lower gear compared with the particularly strong 2017 (GDP: +2.6% yoy, the highest since 2007). With an average of 54.7 in Q2:18, the composite PMI points to GDP growth of circa 2.0% qoq saar, in line with consensus expectations.
The Bank of England (BoE) maintained its policy rate at 0.50%, as expected. In a surprise move, Chief Economist A.Haldane joined those Monetary Policy Committee members who favor a rate increase of 25 bps (currently three members out of nine). Moreover, the BoE expressed greater confidence that the GDP weakness in Q1:18 (+0.1% qoq) will prove temporary (the BoE expects GDP growth at +0.4% qoq in Q2:18). As a result, markets now apply a 70% probability for a rate hike in August (from 50% a week ago).
Investors were on risk-off mode in the past week, due to trade tensions (MSCI World: -1.1% wow). In the US, the S&P 500 fell by 0.9% wow and further by 1.4% on Monday (June 25th). The EuroStoxx under-performed (-1.9% wow and -2.0% on Monday), with the Autos sector taking a hit (-6.5% wow and further -2.4% on Monday | -9.9% ytd). The exporter-heavy DAX30 in Germany (Domestic Earnings: 22% - Other European: 30% - Rest of the World: 48%) fell by 3.3% wow (Monday: -2.5%).
The increased “safe haven” demand led the JPY up by 0.7% wow against the USD to ¥109.95 and core government bond yields were down. Indeed, the US Treasury 10-Year yield declined by 3 bps wow to 2.90%, while the German 10-Year Bund yield declined by 7 bps wow, to 0.34%.