Daily Commentary BY THE CURVE TEAM –

China Defies Warnings and Hits Back

19th of September, 2018

China has retaliated with more tariffs of its own despite the threats of further escalation from the US if they did. Markets don’t seem too fussed at the moment, unless you are watching long term interest rates.

Despite warnings from the US that they would add tariffs to the remaining Chinese imports, China went ahead anyway and announced an additional $60bln of tariffs on US imports.

The newly announced tariffs varied between 5% and 10%, meaning they are largely symbolic. The ball is now back with the US court and markets are waiting to see if they follow through on their threat to tariff the rest of their Chinese imports.

Escalation of the trade war hasn’t worried both markets too much. Equities caught a bid and the USD was a little weaker. The AUD has been a major beneficiary, surging up and through 0.7200, helped by a lift in commodity prices, especially iron ore and copper.

One market worth watching though is long term interest rates. The US 10 year yield has surged up and through 3% in recent days hitting 3.06% overnight. With the Fed set to hike again next week, the lift in longer term rates could throw a spanner in the works for global financial markets.

The other highlight was the RBA minutes from their September meeting. There was little in the way of new information but the minutes did highlight that “members observed that there were still significant tensions around global trade policy and that this represented a material risk to the outlook.” That statement obviously predated the latest escalation.

The other highlight from the minutes was that:

“Members continued to agree that the next move in the cash rate would more likely be an increase than a decrease. However, since progress on unemployment and inflation was likely to be gradual, they also agreed there was no strong case for a near-term adjustment in monetary policy.” 

The RBA will be in the headlines again today with a speech from Christopher Kent titled ‘Money – Born of Credit’ sure to be worth a read.

David Flanagan

Director - Interest Rate Markets