US-China trade war fears roil markets

US-China trade war fears roil markets

A freeze in negotiations between the Trump administration and China over an escalating trade conflict has skittish investors around the world bracing for months of elevated volatility after another sell-off on Wall Street.

Futures indicate that Australia’s S&P/ASX 200 Index is poised for a loss of 33 points, or 0.6 per cent, at the start of trading on Monday. The Australian sharemarket is back at October 2017 levels, last trading at 5788.70 points. Japan’s Nikkei 225 was headed for a loss of 1 per cent.

The broader global sell-off comes in reaction to the souring economic relationship between the world’s two largest economies. The US’ main stock index, the S&P 500, lost 2.2 per cent on Friday, while the volatility index spiked to 21.5, having not breached 20 for all of last year.

Katrina King, director of research for QIC’s global liquid strategies, said markets were not pricing in the prospect of an outright trade war, which would be devastating for shares and corporate bonds at the riskier end of the spectrum.

“I think they’re still priced for a compromise scenario,” Ms King said. “It’s very clear for risk assets, equities and credit markets would suffer if this does mean a downturn.

“Our base case for 2018 was we would have good growth and that is still the case but the reality is that the data has softened somewhat.”

However, Chinese officials hosed down suggestions from Trump advisers that Beijing and Washington were working together behind closed doors on a peaceful resolution on US concerns over intellectual property abuse.

“We have noticed that many US officials have hinted that the two sides are in talks, but that is not the real case,” a Chinese Commerce Ministry spokesman said.

“Under the circumstances, it is even more unlikely for both parties to have negotiation on this issue.”

President Xi Jinping is expected to champion China’s plans to further open up its economy to foreign investment and its role on the world stage in the face of growing US protectionism when he appears at the Boao economic forum, known as Asia’s Davos, on Hainan Island on Tuesday.

China’s government vowed to hit back “forcefully” against Donald Trump’s threat to triple the value of Chinese goods, to $US150 billion, subject to US tariffs. The US President admitted at the weekend investors could suffer some “pain”.

Whether or not the US follows through on its tariff threats may not be known for two months, leaving investors to worry in the meantime that Mr Trump’s hardline negotiating tactics might backfire.

Oxford Economics’ New York-based senior economist Bob Schwartz said if a compromise wasn’t reached to avoid an escalating tit-for-tat trade war there could be an “extreme reaction in the currency and financial markets” over coming weeks.

“Trump is highly sensitive to the stock market as a barometer of his approval ratings,” he said.

“If its recent behaviour is any indication, the prospect of a trade war will send stock prices tumbling, which may motivate Trump to rein in the trade hawks.”

US Treasury Secretary Steven Mnuchin, who has previously talked down the prospect of a trade war, admitted it was now a possibility but said that he was “cautiously optimistic” it would be dodged.

US Federal Reserve chairman Jerome Powell said it was “too early to say” what economic impact the trade dispute would have, as he signalled the central bank was on track to gradually raise interest rates further this year.

“We don’t know the extent to which the tariffs will actually come into effect and, if so, how big that effect will be and what will the timing of it be,” Mr Powell said on Saturday (AEST).

The Fed chairman’s comments came after new data showed the US added a solid, but below-forecast 103,000 jobs in March, while average hourly earnings growth edged up slightly, to 2.7 per cent.

Mr Trump said in a radio interview the US had already lost a trade war against China for many years under past US presidents and conceded the stock market could take a “hit” from his tariff proposals.

“I’m not saying there won’t be a little pain, but the market has gone up 40 per cent, 42 per cent so we might lose a little bit of it,” Mr Trump said.

“But we’re going to have a much stronger country when we’re finished.”

Mr Trump late last week stunned the world by directing US officials to draw up a list of $US100 billion of US imports from China which could be subject to tariffs on top of the $US50 billion proposed last month.

China earlier last week struck back with a proposed $US50 billion of US items to face tariffs of up to 25 per cent. These include pork, soy beans, cherries, cars and aircraft. The world’s second-largest economy has vowed to “fight at any cost” Mr Trump’s escalation.

Mr Trump issued the tariff threats in response to what it calls Chinese theft of intellectual property from American companies, or the forced transfer of their technology to Chinese companies. He has also demanded that Beijing help cut America’s $US375 billion bilateral merchandise trade deficit with China.

On Twitter at the weekend, Mr Trump continued to lash out at China’s alleged unfair practices.

“The United States hasn’t had a Trade Surplus with China in 40 years,” he wrote.

“They must end unfair trade, take down barriers and charge only Reciprocal Tariffs. The US is losing $US500 Billion a year, and has been losing Billions of Dollars for decades. Cannot continue!”

China’s Foreign Ministry said late on Friday the US had “misread the situation and taken an extremely wrong move”.

Mr Trump, meanwhile, is coming under pressure from US business groups, farmers and some free-trade Republicans to avert a tariff war.

The United States Council for International Business president Peter Robinson concedes that China’s unfair trade practices and its mistreatment of US and other foreign companies were “serious problems”.

“But an escalating, tit-for-tat trade war is not the way to solve them, and risks doing serious harm to the American and global economies,” he said.

S&P Global Ratings warned that a breakdown in negotiations and policy missteps could “spiral into a trade war, damaging global business and consumer confidence, investment prospects, and growth”.

The possibility of a tit-for-tat trade war, along with mounting regulatory pressure on US technology companies such as Facebook, have US retail investors at their most pessimistic since September, says a survey by the American Association of Individual Investors.