Tit-for-Tat Tariff Battle Continues

 

Trade War Escalation

Yesterday evening the Trump administration announced that it would officially be moving forward with imposing tariffs on an additional $200 billion worth of imports from China.  The tariffs will become active at the beginning of next week and will start at 10%, before increasing to 25% on January 1, 2019.  Helping to marginally ease the concern over the trade war’s impact, the administration did remove a number of items from the initial list of imports to be taxed, notably Apple watches, consumer electronics, and various child safety products.  In the White House statement released afterwards, President Trump urged the leaders of China to “take swift action to end their country’s unfair trade practices.”

 

 

As expected, today China retaliated with tariff announcements of their own on $60 billion of US goods to become effective next Monday.  The duties will span across 5,207 different US products and will range from 5%-10% before increasing in percentage along with the US tariffs.  “China is forced to respond to U.S. unilateralism and trade protectionism, and has no choice but to respond with its own tariffs,” the Chinese Finance Ministry announced this morning.  At this point in time, China has imposed tariffs on $110 billion worth of US imports while the US has levied $250 billion (with the threat for another $267 billion worth looming).

 

 

Financial Markets Shrug Off Tariffs      

US equity investors were able to look past the escalation in trade uncertainty, perhaps reflecting a view that more severe levels of tariffs may have been expected.  All three major indices finished with gains ranging from 0.54%-0.76%, led by the tech-heavy Nasdaq.  US Treasurys sold off sharply from the beginning of the trading session, as yields/swap rates closed 2 – 8 bps higher across the curve, in a bear steepening pattern.  The yield on the 10-year note settled near 3.06% — its highest level since May and within 6bps of its highest yield in seven years.  The US dollar finished the day with a modest 0.14% gain against major currencies.  In commodity markets, WTI crude futures posted a 1.4% gain to $69.85/barrel after news that Saudi Arabia would be comfortable leaving existing output targets despite the expected decline in market supply resulting from the sanctions on Iran.