Daily Market Color July 5, 2018Trade Wars Remain in Focus Trade War Deadline Approaches Tomorrow morning $34 billion worth of duties on Chinese imports (motor vehicles, medical devices and machinery) are scheduled to become effective, at which time China has promised to retaliate immediately with a series of their own tariffs of equal value on US products (agriculture, SUVs). Speaking ahead of the implementation, this morning Chinese commerce officials advised the US against “opening fire on the entire world”, while stating that China will not “fire the first shot” but at the same time “will not falter from its determination to defend free trade and the multilateral system.” Should this initial wave of duties go into action tomorrow, a second round of bilateral tariffs targeting $16 billion in products is set to be formally announced later in July. President Trump has also threatened an additional $400 billion worth of tariffs down the line if needed. Overall, this tit-for-tat trade war between the world’s two largest economies has put a dark cloud over the future of global trading relationships generally, and thus far there has been no hint of a deal being negotiated in the background to avert the trade battle escalation. Fed Minutes Reference Trade Policy Today the Fed released the minutes from its June meeting in which the Committee made the decision to hike its benchmark borrowing to a target range of 1.75%-2.00%. While the summary of the meeting was largely consistent with reports from other recent gatherings, highlights of the discussions amongst the members in June included: The potential for the economy to heat up too quickly and the appropriate response/preparation by the Fed. At this point in time, the FOMC agreed to maintain gradual increases to benchmark rates. The determination of the neutral Fed Funds rate (level at which there is no growth/slowing in the economy). Fed officials indicated that rate would settle between 2.75% and 3.00% over the long run, based on current economic models. The recognition of a narrowing between short and long term rates. Fed members acknowledged the importance of monitoring the yield curve going forward, especially given the potential for inversion and its historical foreshadowing of a recession. A fresh new area of concern amongst the members was the growing risk of trade wars. “Most participants noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending,” the minutes stated. The FOMC noted that growth-friendly fiscal policies would help to offset a portion of the negative impact from a trade war, but overall impact of any such event or events is still far from certain. Equities Rebound Despite US-China Dispute All three major US stock indices rose between 0.75%-1.15% during today’s trading session, led by gains in the tech sector, as equity investors were able to look past the ongoing scuffle between the US and China. Also helping to boost sentiment surrounding risk assets was a report that the existing tensions between the US and EU over automobile tariffs could taking a step in the right direction. It was released today that German Chancellor Angela Merkel supported a lowering of EU tariffs on US car imports, which could in turn lead President Trump to withdraw his threatened tariffs on autos coming from the EU. Such a move would certainly please executives at major automobile firms, who for the past month have been lobbying the Trump administration to back its stance regarding auto/SUV tariffs. In rates markets, Treasurys held within a tight range throughout the day, as yields/swap rates inched higher on the short end of the curve, while long-term rates finished near unchanged, with the 10-year note yield remaining at 2.83%. In commodities, WTI crude oil futures settled 1.6% lower to $73/barrel after the EIA reported a surprise build in US stockpiles.
