{"id":153028,"date":"2019-08-07T11:45:43","date_gmt":"2019-08-07T15:45:43","guid":{"rendered":"https:\/\/www.countingpips.com\/?p=153028"},"modified":"2019-08-07T08:14:26","modified_gmt":"2019-08-07T12:14:26","slug":"will-the-chinese-retaliate-further","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2019\/08\/will-the-chinese-retaliate-further\/","title":{"rendered":"Will The Chinese Retaliate Further?"},"content":{"rendered":"
August 7, 2019<\/div>
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By <\/strong>Orbex<\/strong><\/a><\/p>\n

Market Shocked by Fresh US Tariffs<\/strong><\/h2>\n

The ongoing<\/strong>\u00a0US-China\u00a0trade war took another dramatic turn last week.<\/strong>\u00a0Initially, focus had been on the fresh set of trade talks taking place in Shanghai.<\/p>\n

Expectations were low given the previous difficulty with talks. However, there was still a level of optimism as the market expected the two sides to finally work together to end the trade war.<\/p>\n

Trump\u2019s Twitter Announcement<\/strong><\/h2>\n

However, following the two days of talks, which ended with seemingly little-to-none progress, the market was rocked by news of fresh US tariffs on Chinese goods.<\/p>\n

Trump announced a further 10% tariff on $300 billion worth of Chinese goods<\/strong>\u00a0via a post on Twitter. The post read:<\/p>\n

\"\"<\/a><\/p>\n

China Retaliates with Currency Devaluation & US Agriculture Exit<\/strong><\/h2>\n

China immediately responded<\/strong>\u00a0to the news saying that it\u00a0plans to retaliate.\u00a0<\/strong>And\u00a0it seems they\u2019ve already made their first moves.<\/p>

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In early trading on Monday morning, the\u00a0Chinese yuan spiked sharply lower against USD<\/strong>.\u00a0USDCNH was trading above the 7 level for the first time since the Global Financial Crisis in 2008.\u00a0<\/strong><\/p>\n

The move has been interpreted as a clear retaliation by the Chinese government against Trump. The Treasury Department, therefore, swiftly called out\u00a0China for currency manipulation<\/a>\u00a0early on Tuesday.<\/p>\n

Following this,\u00a0the People\u2019s Bank Of China (PBOC) helped contain the falls. The USDCNH outlook remains bullish above the 7 mark and this is likely to remain the case should the PBOC maintain a limited size of yuan longs.<\/strong><\/p>\n

China did also\u00a0suspend the purchase of US agricultural products<\/strong>\u00a0as early as Monday this week in response to Trump\u2019s new trade war rout. China\u2019s Commerce Ministry did this as an indication that\u00a0China both can and will use other means of retaliation<\/strong>\u00a0to hit back.<\/p>\n

How Else Could China Retaliate & What Would The Market Impact Be?<\/strong><\/h2>\n

The two retaliatory moves are likely just the first step for the Chinese.<\/p>\n

The\u00a0option we can expect the most is for a further increase in\u00a0<\/strong>tariffs\u00a0<\/strong>on other US goods.<\/strong><\/p>\n

However,\u00a0China is likely very near the limit of how many tariff increases its own economy can withstand.\u00a0<\/strong>Tariffs on US goods impact the turnover and profitability of domestic businesses, many of which are already suffering as a result of US tariffs. The game of tit-for-tat tariff raising is, therefore, unlikely to be sustainable for China.<\/p>\n

In fact, should China announce tariffs of its own, global equities would be shunted further lower. So the Asian giant will no doubt be considering alternative options now.<\/strong><\/p>\n

Meanwhile, the hit to global trade has been revealed. European, Asian and UK equities have all been under pressure this week along with US and Chinese stocks.<\/p>\n

Ban on Rare Earth Exports<\/strong><\/h2>\n

Following the breakdown of talks in May and the subsequent tariffs from the US,\u00a0the prospect of China banning exports of\u00a0rare earths<\/a>\u00a0materials was raised.<\/strong><\/p>\n

These materials are used in many high tech applications and operations. And with China holding a monopoly in their supply, such a move could be devastating for US businesses. This would be\u00a0especially damaging to the highly profitable US tech sector\u00a0<\/strong>which has, so far, been relatively shielded from the impact of the trade war.<\/p>\n

The potential damage to tech companies would likely be reflected in a sharp move lower in the NASDAQ (along with a general risk-off tone to equities).<\/strong><\/p>\n

Unreliable Entity List<\/strong><\/h2>\n

Another route which we might see China taking would be to announce its own\u00a0\u201cEntity List\u201d<\/a>. This would be its own version of the one the US used to ban Huawei from dealing with US companies.<\/strong><\/p>\n

The Chinese Ministry of Commerce of China (MOFCOM) announced on May 31st, 2019 that it was drawing up a list to be announced shortly. With such a list, the Chinese government could prohibit Chinese companies from conducting business with specified US companies.<\/p>\n

Once again,\u00a0such a move would weigh heavily on US equities prices.<\/strong>\u00a0Gold prices would likely be well supported<\/strong>\u00a0in either instance. Safe-haven inflows are already boosting gold higher this week. The precious metal is now trading at its highest level since May 2013! This comes as investors flood to safety in light of the ongoing equities collapse.<\/p>\n

How Will This Impact US Monetary Policy?<\/strong><\/h2>\n

The Fed is certain to be watching these developments with disappointment.\u00a0The central bank cited the ongoing risks from the trade war as a\u00a0reason for cutting rates last month, despite downplaying the likelihood of further easing.<\/strong><\/p>\n

However, with trade tensions increasing once again,\u00a0the Fed could need to ease again.\u00a0<\/strong>This is despite the bank stating that it shouldn\u2019t respond to trade disputes.<\/p>\n

The course of\u00a0Chinese retaliation will undoubtedly be a key factor<\/strong>\u00a0in the impact on both the US and global economy in the coming months.<\/p>\n

Market Impact<\/strong><\/h2>\n

\"spx500\"<\/a><\/p>\n

The reaction in US equities has been severe. The SPX500 has reversed heavily from recent highs around 3031, breaking back down below the 2958.22 level. Prices broke outside the bullish trend line from last year\u2019s lows, with structural support sitting just beneath at 2811. A break here could pave the way for a much deeper run down to support at the 2727 level. Below there, the 2623 level stands as the next support, by which point the decline would have exceeded the 50% Fibonacci retracement of the current bull trend.<\/p>\n

By <\/strong>Orbex<\/strong><\/a><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

By Orbex Market Shocked by Fresh US Tariffs The ongoing\u00a0US-China\u00a0trade war took another dramatic turn last week.\u00a0Initially, focus had been on the fresh set of trade talks taking place in Shanghai. Expectations were low given the previous difficulty with talks. However, there was still a level of optimism as the market expected the two sides […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-153028","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/153028","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=153028"}],"version-history":[{"count":2,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/153028\/revisions"}],"predecessor-version":[{"id":153042,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/153028\/revisions\/153042"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=153028"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=153028"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=153028"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}