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Fasten seatbelts for the Trump twitter-storm fallout

Monday 26th August 2019

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It will be a case of fasten your seat belts and expect turbulence as markets across Asia open today after the escalation of the US-China trade war, US President Donald Trump's tweets labelling his own Federal Reserve chair Jerome Powell an “enemy” and his threatening tariffs on French wine.

That's even as he headed to France for the latest G7 meeting of the leaders of nations supposed to be US allies.

“We should expect a rough week ahead as investors ponder just how high the stakes have been raised,” says Mark Lister, the head of wealth research at Craigs Investment Partners.

Powell gave a much-anticipated speech at the latest annual central bankers' meeting at Jackson Hole in Wyoming but it was clear Trump was disappointed

Powell said the Fed stands ready to cut interest rates further, if necessary, and acknowledged the Trump-induced trade war is playing a role in slowing global economic growth.

But at the same time, he argued that “while monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rulebook for international trade.”

The Fed cut interest rates last month by 25 basis points for the first time since the global financial crisis and Lister says the market has another 100 basis points of cuts priced in over the next 12 months.

China responded to Trump's latest tariff threat – the cut in date was postponed from Sept. 1 to mid-December to save Christmas – by imposing tariffs between 5 and 10 percent on US$75 billion of US exports to China.

Lister says these will hit autos and related components most.

But Trump quickly upped the ante by increasing existing tariffs on US$250 billion of Chinese exports to the US from 25 percent to 30 percent and increasing the tariffs that kick in from mid-December on another US$300 billion of Chinese imports from 10 to 15 percent.

Later at the G7 meeting in France, Trump said he regretted the escalating trade war but then the White House said his remarks had been misinterpreted and that he'd meant he regretted not raising the tariffs higher.

“We've long thought the trade spat between the US and China could drag on for some time and the recent escalation confirms it will get worse before it gets better,” Lister says.

“Both sides have plenty to lose, with a decent chunk of global growth likely to be eroded should things continue the way they are – if it develops into a full-blown trade or currency war, the negative impact on activity, sentiment and supply-chain-disruptions could indeed push the world into recession.”

While the US economy is in a stronger position short-term, as a state-controlled economy, “China arguably has more levers to pull while its citizens are certainly more accustomed to making sacrifices for the greater good,” Lister says.

“President Xi Jinping also has time on his side, given his term of leader is indefinite while President Trump has an expiry date.”

Lister says although the current escalation feels “scary,” a deal of some sort could be reached eventually.

“However, we shouldn't necessarily count on sanity prevailing. When politics and egos are involved, anything can happen,” he says.

“In the meantime, don't panic but do take cover.”

Flash PMIs – performance of manufacturing indices – last week for Japan and Europe showed signs of improvement and stability, but activity in the US softened more than expected with manufacturing activity contracting for the first time since September 2009.

New Zealand's latest PMI also showed manufacturing activity contracted for the first time in seven years.

Both New Zealand and the much larger economies are still showing growth in the services sector.

At the end of this week and early next week, we will get the latest readings on how China's manufacturing sector is faring.

The official PMI will be released on Saturday and the Caixin PMI the following Monday. Last month's official index showed manufacturing contracting but their services sector was still expanding.

The key local indicator this week will be ANZ's business confidence survey due at 1pm on Thursday. Last month's report showed headline confidence getting even more negative while the own activity indicator, which tends to be a better indicator of GDP, fell from a net 8 percent expecting better times to just 5 percent.

This week will also be the last week of the reporting season with plenty of heavyweights still to report, including telecommunications lines company Chorus, courier company Freightways, Meridian Energy, Port of Tauranga and Scales, all of which should provide anecdotal evidence of the state of the economy and the outlook comments will be particularly closely watched.


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