America First Clashes With Made in China 2025


  • The escalation of trade tensions between the world’s two largest economies is scaring investors
  • The inability of China to match the escalation by the US invites an asymmetrical response
  • EM FX continues to get hammered by growing risk-off sentiment
  • Poland May industrial and construction output came in firmer than expected; National Bank of Hungary is expected to keep rates steady at 0.9%

The dollar is broadly firmer against the majors as risk-off sentiment deepens.  The yen and Swissie are the exception, up on the day and outperforming while the Scandies are underperforming.  EM currencies are broadly weaker.  PHP and MYR are outperforming, while ZAR and TRY are underperforming.  MSCI Asia Pacific was down 1.6%, with the Nikkei falling 1.8%.  MSCI EM is down nearly 2% so far today, with the Shanghai Composite down nearly 4% after reopening from holiday.  Euro Stoxx 600 is down 0.8% near midday, while US futures are pointing to a lower open.  The 10-year US yield is down 4 bp at 2.88%.  Commodity prices are mostly lower, with WTI oil down 1.4%, copper down 1.3%, and gold up 0.1%.

The escalation of trade tensions between the world’s two largest economies is scaring investors, who are liquidating equities and buying core bonds.  The dollar and yen are the strongest of the major currencies.  The Swiss franc is mostly steady as it too is benefiting from the unwinding of risk trades.

The main impetus comes from the Trump Administration.  In response to China’s retaliation for the 25% tariff on $50 bln of Chinese goods for intellectual property rights violations, the US has announced that it will put an additional 10% on $200 bln of Chinese goods.  Moreover, the US threatened that if Beijing retaliates, it will slap a tariff on another $200 bln of Chinese goods.  China goods imports from the US amount to around $130 bln.  China cannot play a tit-for-tat strategy unless it doubles and triples up on tariffs for existing goods.  While it is already doing this, there seems to be some limit.

The inability of China to match the escalation by the US invites an asymmetrical response.  That means if China cannot win in this space that it will look for another place to express its displeasure with the US action.  There are numerous areas in which the US seeks China’s cooperation, such as North Korea, Iran, terrorism, and the South China Sea.  The US is not invincible.  The initial round of tariffs would seem to hit mostly non-Chinese supply chains, but as the US increases the range of goods with tariffs, consumer goods will also likely see tariffs.

However, the asymmetries are evident.  Many Chinese companies are dependent on US components.  This is one of the lessons from ZTE.  Note that the defense spending bills that passed the US Senate yesterday by 85-10 contain a section that unwinds the ZTE deal that the White House engineered.  The bill must now be passed by the House of Representatives.  In addition, the US Treasury is expected to unveil new restrictions on Chinese investment in the US by the end of the month.

The escalating trade tension has sucked the oxygen from other potential drivers.  Fortunately, there is a light economic calendar.  The ECB conference in Sintra has seen Draghi reiterate what he said last week.  Powell, Kuroda, and Lowe are scheduled to speak tomorrow.  The eurozone’s April current account surplus narrowed, while construction output rose.  The US reports May housing starts and permits, but this these tend not move the market in the best of times.

For many investors, today is about damage control.  The MSCI Asia Pacific Index fell 1.6% in its fifth consecutive loss.   It fell to a marginal new low for the year.  China’s markets re-opened after yesterday’s holiday with a 3.8% drop in Shanghai and a 5.8% drop in Shenzhen.  The index of China’s shares that trade in Hong Kong shed 3.2%.  Japan’s Nikkei fell 1.8%.  A double top near 23000 warns of potential toward 21000.

The MSCI Emerging Market Index is off nearly 2%, the most in this five-day swoon, and is trading at levels not seen since last October.  The push below 1100 is a worrisome technical development.  The 1052 area corresponds to a 38.2% retracement of the rally since early 2016.  The 50% retracement is seen near 982.  The combination of tighter US monetary policy and the prospects were increased trade tensions weigh on a particularly vulnerable asset class, and idiosyncratic challenges make for a challenging period.

European shares are also being sold.  The Dow Jones Stoxx 600 is off 0.8%.  It is the third consecutive day of losses.  The benchmark made a new two-month lows.  The 383 area corresponds with a 50% retracement of the recovery off the March lows.  The 61.8% retracement is found near 378.

The risk-off mood is helping to lift core bonds.  Yields in the US, UK, and German 10-year benchmarks are off 4-5 bp.  That puts the US yield below 2.87%, a three-week low.  The low from late May was seen near 2.76%.  In Europe, Italy remains the laggard.  Its 10-year bond yield is about one basis point higher, and the two-year yield is five basis points firmer.

The euro initially extended the recovery seen yesterday and made it to $1.1645 before the trade news broke.  It was subsequently sold through yesterday’s lows, setting up a potential outside day.   Last week’s low near $1.1545 has been taken out, and the next target is the late-May low near $1.1510.  The $1.1450 area marks the 50% retracement of the euro’s rally that began in early 2017.  The 61.8% retracement is just below $1.12.

Sterling has been pushed through the late May low of $1.3200 to trade at new lows for the year.  The double top pattern we have been tracking projects into the $1.30-1.31 area.  The 50% retracement of sterling’s recovery from the flash crash (Bloomberg records the low at $1.1840) is found near $1.3100. The 61.8% retracement is $1.28.  The government lost a vote in the House of Lords yesterday, and this will make for a challenging House of Commons session tomorrow.

The dollar is being sold through a three-week uptrend against the yen.  The trendline is found near JPY109.85.  Last week, the greenback was knocking on JPY111.00.  Initial support now is pegged near JPY109.50, where a $354 mln option expires today.   A break of JPY109.50 signals a likely test on the JPY109.20 low seen on June 8 and June 11.  A convincing violation could spur dollar losses toward JPY108.

The Canadian dollar is trading at new lows for the year.  In early June 2017, the US dollar was trading near CAD1.35 before the Bank of Canada signaled that is was prepared to raise rates.  Above CAD1.3265, and the greenback is poised to test CAD1.3350.  The Australian dollar is also at new lows for the year.  There is support seen near $0.7335-0.7750, though over the medium-term, we look for a break of $0.7000.  Lastly, we note that dollar is moving higher against the Chinese yuan for the third session and near CNY6.48, the greenback is at its best level since mid-January.

EM FX continues to get hammered by growing risk-off sentiment.  Concerns about the brewing trade war along with the prospects of higher US interest rates together mean that the global backdrop for EM remains very negative.  Yet divergences are being seen and likely to continue.   The worst EM performers YTD are ARS (-32.5%), TRY (-20.5%), BRL (-12%), and ZAR (-11%), while the best are COP (+2.5%), MYR ((1%), and CNY (+0.5%).

Poland May industrial and construction output came in firmer than expected.  The former was expected to rise 3.6% y/y vs. 9.3% in April, but rose 5.4% instead.  The latter was expected to rise 18.2% y/y vs. 19.7% in April, but rose 20.8% instead.  Real retail sales will be reported Thursday, which are expected to rise 6.0% y/y vs. 4.0% in April.  Central bank minutes will be released Thursday.  Unlike Hungary, Poland officials have not yet shown any concern about currency weakness and has maintained its ultra-dovish stance.

National Bank of Hungary is expected to keep rates steady at 0.9%.  EUR/HUF made a new high for this move today near 325.  While no one expects any move, we suspect bank officials will lend the forint some more verbal support today now that Hungarian bonds have come under greater pressure.  Deputy Governor Nagy said the bank is prepared to tighten monetary conditions if the weak forint endangers its inflation target.  Before, the bank had shown little concern with the exchange rate and so it is moving away from its ultra-dovish bias.