Trade tension frightens investorsBy Arnaud Masset
Asian equities fell on Wednesday after US President Trump slapped tariffs on a further $200 billion of Chinese imports. The Nikkei 225 gave up 1.19% to 21,932 points, while Chinese stocks bore the brunt of the sell-off. The Shanghai Composite fell 1.76% and the tech-heavy Shenzhen Composite slid 1.96%. European equities followed: the German DAX already gave up more than 1%, the Eurostoxx 50 fell 0.85% while the SMI erased 1%.
In FX, the announcement triggered a risk-off reaction, which translated into a sell-off in emerging market currencies and a broad USD appreciation. The Russian ruble and the Turkish lira suffered the most as both fell 0.50%. The Chinese yuan slid 0.48% with USD/CNH rising to 6.6815. Export-oriented countries also felt the pain. The Australian dollar fell the most within the G10 complex as it erased 0.65% to $0.7410. Safe-haven currencies such as the Swiss franc and the Japanese yen held ground. In the EM complex
The Trump administration’s new 10% tariff hit-list includes electric vehicle batteries to air conditioning machines. The list is not definitive yet and is expected to come into effect in December. China already declared the tariffs “totally unacceptable” and promised it will retaliate dollar-for-dollar.
Canadian conundrumBy Vincent-Frédéric Mivelaz
The Canadian economy is in good shape. Governor of the Bank of Canada (BoC), Stephen Poloz, is therefore in a difficult situation. With favourable economic data on one side and a potential trade war with its largest commercial partner on the other, economic policy lies in the grey zone. With inflation above BoC’s 2% target, wage growth largely exceeding consumer price indices, unemployment at a decade low and, most importantly, an economic expansion above the 2.2% projections from the Canadian monetary authority, the odds would most certainly support further monetary policy tightening.
However, uncertainties regarding further trade sanctions from the US remain. The North American Free Trade Agreement (NAFTA) renegotiations, started nearly a year ago, keep dragging and tariffs are looming on lumber, steel, aluminium and possibly autos and automotive parts. Since Canadian interest rates remain among the lowest and the loonie continues to weaken, we see no reason not to hike. Now at 1.25%, the BoC’s policy interest rate will be increasing by a quarter percent to 1.50%. USD/CAD is up 4.7% in 2018: we would therefore expect the pair to head to 1.3170 after the BoC’s announcement.