Equities, yuan take hit as Trump dials up trade war with China

Hong Kong, China | AFP | Asian equity markets tanked and the yuan hit an 11-year low Monday after US President Donald Trump ramped up his trade war with China by hiking tariffs on more than half-a-trillion dollars worth of imports.

However, dealers pared earlier steep losses after the president said the two sides would restart talks soon, providing some much-needed calm.

The decision on Friday stunned investors, who ran for the hills, hammering European and Wall Street stocks, while safe havens such as the yen and gold — go-to assets in times of turmoil and uncertainty — surged.

The move, which also came with an outburst against China by the American president and a call for US firms to leave the country, overshadowed a broadly dovish speech by Federal Reserve boss Jerome Powell but one that fell short of Trump’s demand for deep interest-rate cuts.

Friday’s tariff hike was in response to Beijing’s decision to raise levies on $75 billion of US goods.

US tariffs on $250 billion of Chinese goods will rise to 30 percent and those planned on $300 billion in Chinese products will go to 15 percent from October 1.

White House spokeswoman Stephanie Grisham added that the president regretted not raising levies more.

On Monday, China’s yuan currency fell briefly to 7.1487 to the dollar — its weakest level since early 2008 at the height of the global financial crisis. The drop is likely to ire Trump, who has labelled Beijing a currency manipulator.

“The gloves are coming off on both sides and as such yuan depreciation is an obvious cushion against US tariffs,” Mitul Kotecha, a senior emerging markets economist at Toronto-Dominion Bank, said.

“As long as China can ensure that yuan weakness is well controlled i.e. it does not provoke strong outflows, expect to see further depreciation in the currency.”

There was some sign of hope after Trump said at the G7 summit in Biarritz, France, that a fresh round of talks between US and Chinese negotiators would “start very shortly”.

“China called last night… said let’s get back to the table, so we’ll be getting back to the table,” he told reporters, adding that officials had made two “very, very good calls” and that “they want to make a deal”.

Earlier China’s point man on the talks looked to reduce tensions by saying “we are willing to solve the problem through consultation and cooperation with a calm attitude”.

– Fed boss in crosshairs –

Hong Kong sank 1.9 percent — but paring early losses of more than three percent — with investors also spooked by fresh violent protests in the city that saw police use water cannon for the first time.

Shanghai lost 1.2 percent and Tokyo ended 2.2 percent down with investors unmoved by news that Trump and Japan’s Prime Minister Shinzo Abe had reached an agreement in principle on a major trade deal.

Sydney, Seoul, Wellington, Jakarta and Taipei all sank more than one percent, while Bangkok was off more than two percent. However, Mumbai rose more than one percent thanks to economy-boosting measures by officials.

In early trade Paris dipped 0.2 percent and Frankfurt eased 0.4 percent.

The flight to safer havens saw gold jump to a six-year high around $1,550 per ounce, while the Japanese yen touched its strongest level since the end of 2016 before easing slightly in later trade.

Fears about the trade war’s impact on demand also hit oil prices with both main contracts extending Friday’s sell-off.

The tariffs news overshadowed Powell’s much-anticipated speech on Friday, where he pledged to ensure US growth and pointed to fresh stimulus if inflation softens.

He acknowledged the bank has no “rulebook” for dealing with the US-China trade war but did not announce any more rate cuts, sparking outrage from Trump, who blames the Fed boss for holding the economy back.

“As usual, the Fed did NOTHING!” Trump said.

“My only question is, who is our bigger enemy, Jay Powel or Chairman Xi?” Trump said, misspelling the Fed chief’s name and referring to Chinese leader Xi Jinping.

“Referencing the Fed chair as the enemy is, frankly, just par for the course… but referencing President Xi now as the enemy rather than ‘my friend’ is a lot more serious,” said Ray Attrill at National Australia Bank.

“Indeed, the fallout is already apparent in an editorial in Saturday’s state-run People’s Daily, saying China will follow through with retaliatory measures announced Friday and fight the trade war to the end in the face of the US’s failure to keep its promises.”