US-China Tariff Escalation Sinks Risk Assets

 

Beijing levies new tariffs on $60 billion worth of US goods. Whatever optimism markets had after trade negotiation updates on Friday was quickly erased after Trump’s recent tariff tweets and China’s Ministry of Finance announced new retaliatory tariffs on US goods. Chinese officials characterized the new tariffs as a “response to US unilateralism and trade protectionism.” A resolution to the escalating trade conflict does not seem likely in the near term, President Trump telling reporters “I love the position we’re in” and “I think it’s working out really well.” Whether or not the new tariffs increase the US’s leverage remains to be seen, but for the time being equity market volatility is expected to remain elevated, especially for the numerous companies with significant revenue exposure to China.

 

 

Risk assets sell off on trade concerns. Equities fell world-wide in response to China’s move and the apparent trade impasse. The FTSE All World Index fell 1.8% (it’s biggest fall since December) and the S&P 500 and Dow Jones Industrial Average fell 2.41% and 2.38% respectively. US companies with high exposure to China were particularly hurt –  Apple, Boeing and Caterpillar falling 5% on the day. Equity volatility also ticked higher, with the VIX or “Fear Index” rising to 20.55 – it’s highest level since January of this year.

 

 

Treasurys get safe haven bid, yields fall 7-8 basis points across the curve. The 10 year Treasury yield fell to 2.40% and Fed Funds futures now imply over a 70% likelihood of a Fed rate cut by year end. Meanwhile, Minneapolis Fed President Neel Kashkari publicly stated that he thinks the US is in a “very strong position” in trade negotiations with China. That sentiment did little to quell anxiety in rates markets, as the MOVE Index, a measure of the cost of hedging in interest rate markets, climbed higher to 57.9 – it’s highest level since the Fed surprised markets in March it was no longer inclined to raise rates in 2019.