Who's afraid of the big bad trade war? Not the world stock markets it seems.
The response to US President Donald Trumps decision to go ahead next week with collecting 10 per cent tariffs on another $200 billion of Chinese goods, ratcheting up to 25 per cent in January, was unusual and unexpected on Tuesday.
It initially hit US stocks, Treasuries and the dollar while stirring a rally in Chinese equities and the yuan in Asia. China then confirmed it would retaliate but still traders barely flinched.
European stocks gained over a third of one per cent on course for a third day of gains, Wall Street futures climbed and even copper and the Aussie dollar, which have been highly sensitive to the trade tensions in recent months, held firm.
“In a way it is remarkable that the market is holding up so well,” said Rabobank's Head of Macro Strategy Elwin de Groot.
“This is clearly a further ratcheting up of the trade war and we are now getting close to a situation where you can almost speak of a full-fledged trade war. Clearly that is not positive.”
One theory for the becalmed reaction was that the $200 billion US move had been largely priced in to markets following weeks of reports and social media speculation.
Chinese shares did dip initially as Asia digested the details but then rallied to push the blue-chip CSI index up 2 per cent. Some locals were betting that Beijing will step up infrastructure investment to keep the economy humming.
Japan's Nikkei also ended 1.4 per cent higher and MSCI's 24-country emerging market index was up for the fourth day in the last five as 1 per cent gains in Poland and a 0.7 per cent rise in Russia added to Asia's rebound.
Trump's announcement “is largely consistent with the claims made earlier’’, Citi analysts said in a note, estimating a 33 basis point drag on China's economic growth from the 10 per cent tariff. “The trade war may get worse before it gets better. A full-blown trade war looms closer now,” they added however.
China's promise to respond to the new US tariffs also came as The South China Morning Post newspaper reported Beijing was reviewing plans to send a delegation headed by Vice Premier Liu He to Washington for trade talks.
Liquidating shorts
In currencies, the dollar was broadly flat at 94.438 although on an individual basis it was a fraction firmer against the Japanese yen at just shy of 112.
At the same time, it was down slightly against the Chinese yuan in 'offshore' markets. The sensitive Australian dollar also moved up 0.4 per cent to $0.7212 having also initially been hit when the tariff details broke.
With FX participants wary that Beijing authorities may quickly step in to markets at any point, investors were “spontaneously” liquidating their short yuan positions, said a trader at one Chinese bank.
“China is likely to reject the invitation from the US Treasury for the new round of trade talk,” OCBC Bank also said in a note on Tuesday.
Oil prices fell on worries rising trade tensions could dent global demand for crude. US crude futures fell 21 cents to $68.70 a barrel, while international benchmark Brent futures lost 35 cents to $77.70 per barrel. Gold was weaker too, with spot prices down 0.1 per cent at $1,199.2 an ounce.