European markets lower after Trump's latest tariff threats
President Trump’s controversial comments that the Federal Reserve is wrong to raise US interest rates and his new threats to impose tariffs on $500bn worth of Chinese imports have unsettled investors as the trading week winds to a close.
The dollar was damaged by the remarks, giving some support to Wall Street. But European markets likely to be hit by any escalation of trade tensions, Germany in particular, came under pressure. The final scores showed:
- The FTSE 100 finished down 0.07% or 5.18 points at 7678.79
- Germany’s Dax dropped 0.98% to 12,561.42
- France’s Cac closed 0.35% lower at 5398.32
- Italy’s FTSE MIB fell 0.41% to 21,794.60
- Spain’s Ibex edged up 0.04% to 9724.8
On Wall Street, the Dow Jones Industrial Average is currently up 29 points or 0.12%.
On that note, it’s time to close for the day. Thanks for all your comments, and we’ll be back next week.
Stock markets are likely to remain under pressure even if this latest trade dispute blows over, says Oliver Jones at Capital Economics:
We suspect that equities across Emerging Asia would slump once more if President Trump followed through with his latest tariff threat. Stock markets in Europe would probably be hit even harder than they have been so far too.
Meanwhile, although the S&P 500 has proved fairly resilient to trade worries so far, and has actually risen since they resurfaced in June, we doubt that this will last.
The retaliation by other countries to US protectionism so far has mostly been aimed at US farmers, not US multinationals. But that could change. In particular, we suspect that China will start to target US multinationals operating in China directly rather than imposing more tariffs of its own.
What’s more, even if this latest escalation in the trade war is somehow averted, we think that there are other reasons to be pessimistic about the outlook for equities in both the US and the rest of the world. Regardless of the direction of US trade policy, we think that China’s economy will lose more momentum over the rest of this year, and forecast that the US economy will slow sharply in 2019 as the cumulative effects of Fed tightening and the fading fiscal boost start to bite.
With this in mind, we forecast that the S&P 500 will fall to 2,300 by the end of next year, compared to just over 2,800 now, and think that equities in the rest of the world will fall sharply too.
Stock markets are off their worst levels, although European indices are struggling compared with the UK and Wall Street. Chris Beauchamp, chief market analyst at IG, said:
After a few days without trade war headlines the topic has come back to life, as Trump turns the trade war rhetoric all the way up to 11 with his announcement that $500 billion of Chinese goods could suffer penalties. Having come away from the NATO summit with an apparent win using his strong-arm negotiating tactics, this move appears designed to bring the Chinese to the table. Markets have recovered from their initial shock, perhaps indicating that this kind of newflash is starting to lose its power.
The news spoiled the FTSE 100’s attempt to move above the 7700 zone, which has held back progress for over a month now, while once again the Dax is taking the news on the chin, shedding 150 points as the week winds down and wiping out most of the progress made over the past few days.
Another trend undergoing a reversal is that of the US dollar, which has fallen back today after weeks of gains. The dollar index has seen some outflows, with the safe-haven yen a beneficiary as investors cut back on risk thanks to the trade war rhetoric. However, the ongoing rally is not finished yet it seems, Jerome Powell’s comments this week having made it clear that the Fed has no intention of deviating from current policy, regardless of the views of the White House.
The dollar remains in the doldrums as the US currency continues to react to Donald Trump’s complaints about its current strength, along with investor concerns about the escalating trade war tensions with China.
The dollar index, a measure of its value against a basket of other major currencies, is down 0.6% after it reached a one year high on Thursday.
The weakness of the dollar has benefited the pound, which is up 0.73% to $1.3107 against the US currency, despite the continuing uncertainties over Brexit.
One of the US central bank’s members has responded to Donald Trump’s comments. Reuters reports:
The Federal Reserve will remain unaffected by President Donald Trump’s comments on U.S. monetary policy and is focused on achieving the goals set for it by Congress, St. Louis Federal Reserve Bank President James Bullard said on Friday.
“The (Fed’s policy-setting) committee has a mandate to keep inflation low and stable and obtain maximum employment for the U.S. economy, so people can comment, including the president and other politicians, but it’s up to the committee to try to take the best action we can to achieve those objectives,” Bullard told reporters following an event in Glasgow, Kentucky.
Wall Street opens lower after Trump escalates tariff dispute
US markets have made a nervous start but the falls are not as bad as had been feared earlier. Investors are of course concerned about the latest threats from Donald Trump about imposing tariffs on $500bn worth of Chinese imports to the US, but there is some support for markets from Microsoft’s forecast beating results.
The Dow Jones Industrial Average is down 26 points while the S&P 500 opened just 0.06% lower. The Nasdaq Composite managed to edge up slightly, up 0.19% at the start of trading.
Still with trade, and German chancellor Angela Merkel said in her annual news conference that US complaints only take into account the trade in good. When trade in services and repatriation of profits are included the figures favour the US, she said.
She criticised the tit for tat tariffs imposed or threatened by the US and China:
We see these potential tariffs both as a breach of WTO rules and also as a danger to the prosperity of many in the world.
Back with the US, and Trump is continuing his attack on “terrible” trade deals:
Farmers have been on a downward trend for 15 years. The price of soybeans has fallen 50% since 5 years before the Election. A big reason is bad (terrible) Trade Deals with other countries. They put on massive Tariffs and Barriers. Canada charges 275% on Dairy. Farmers will WIN!
— Donald J. Trump (@realDonaldTrump) July 20, 2018
Over in Canada, inflation figures came in higher than forecast.
The annual rate rose to 2.5% in June from 2.2% the previous month, more than the expected figure of 2.3%. This is the highest figure since February 2012.
And so does the Federal Reserve again:
....The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates - Really?
— Donald J. Trump (@realDonaldTrump) July 20, 2018
Trump has now turned from trade wars back to currency wars, and this time Europe is getting it too.
China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day - taking away our big competitive edge. As usual, not a level playing field...
— Donald J. Trump (@realDonaldTrump) July 20, 2018
The latest Trump tariff attack on China at least keeps Europe on the sidelines for the moment, sayd Edward Rumble, co-manager of the RWC Continental European Equity fund. He said:
The potential for more restrictive trade between nations may be a serious threat to global growth, and the steady increase in rhetoric and retaliatory actions was already worrying prior to today’s latest comments.
One thing for European investors to consider is that, if Trump is obsessed with China, it does at least temporarily keep his sights off Germany and other European nations. However, given Germany has a €100bn trade surplus with the US, at some stage he will likely come for them as well.
Such actions represent a reversal of a 50-year trend to more liberal trade that has helped fuel economic prosperity around the world for decades. Not surprisingly, many companies are not well prepared for such a scenario, indeed they have been taking advantage of the open environment to optimise manufacturing efficiency on a global basis. In many cases, the current structure will not be optimal if trade barriers require local production in end markets to ensure competitiveness.
The current escalation in trade war rhetoric makes sense in the context of November’s mid=term elections, says Will Hobbs, head of investment Strategy at Barclays Smart Investor. He said:
We cannot pretend to know for sure that this is all part of a crude negotiating strategy on the part of the US administration. However, today’s sharp escalation makes sense in such a context, particularly with the midterm campaign trail on the horizon - The White House needs to force their opponents to swerve first in this game of trade chicken. On the other side, the political nature of the tariffs threatened to date, such as soybeans, suggests that the Chinese administration see a potential weakness in the President’s approaching moment of indirect electoral accountability.
As November’s US midterm elections loom larger, we see economic and political self-interest helping to de-escalate the scrap. In the meantime, the potential for capital markets to be dragged into a disciplinary role suggests investors will again need to call upon their stores of composure to see this through.
Olaf van den Heuvel, chief investment officer at Aegon Asset Management, warns that the US president risks destabilising the global economy, and the financial markets:
“So far the Trump trade policy has been more about creating leverage in a negotiation than about levying actual tariffs. Of course, as in a game of poker, you sometimes have to up the ante. The risks are high at this level.
The impact on world economic growth of a levy of this magnitude will be severe and will likely have a strong negative impact on markets.”
Donald Trump is adamant that he won’t be knocked off course by stock market volatility.
Wall Street is up around 30% since the 2016 presidential election, which Trump says gives him a cushion to challenge China et al on trade.
He put it to CNBC:
This is the time. You know the expression we’re playing with the bank’s money.”
Investor, though, will consider that it’s their money, and fear that a trade war will wipe out their recent gains.
European car shares are falling sharply, following president Trump’s threat to deepen the trade dispute with China.
Volkswagen are down 2.3%, and BMW have lost 1.5%, on fears that the US could impose tariffs on EU car imports soon.
Artjom Hatsaturjants, research analyst at Accendo Markets, says market sentiment has “soured” since Trump threatened to go ‘whole hog’ and impose tariffs on all $500B of Chinese imports to the US.
Here’s another clip, of Donald Trump explaining why he’s “not thrilled” that the US Federal Reserve keeps raising American interest rates:
Trump lays into the Federal Reserve, says he's 'not thrilled' about interest rate hikeshttps://t.co/DlZtnmtUi0 pic.twitter.com/zu8DEmiszL
— CNBC (@CNBC) July 20, 2018
Trump: I'm doing it for America
CNBC have now released a video clip of their interview with president Trump.
In it, Trump claims that America is being “taken advantage of” by China, the EU, Mexico, and Japan, because they all run trade surpluses with the US.
Specifically on China, Trump says America is “down a tremendous amount” - with a trade deficit of at least $375bn - and he’s going to fix it.
The president then threatens to put tariffs on all China’s $500bn of imports, because Beijing retaliated against America’s initial tariffs on $50bn of goods earlier this year.
And he batted away the prospect that Wall Street might plunge if a trade war broke out.
Here’s the key quotes:
Trump: “I raised 50, and they matched us. I said: ‘you don’t match us, you can’t match us because otherwise we’re always gonna be behind the A ball’.”
CNBC: “Would you ever get to 500, though?”
Trump: “I’m ready to go to 500”
CNBC: With the mid-terms on the horizon? What if the stock market were to go down?
Trump: If it does it does.
CNBC: [what if it falls] 20%?
Trump: I’m doing this to do the right thing for our country. We have been ripped off by China for a long time.
Here’s the video clip:
Updated
Trump’s threat to launch a full-blooded trade war with China has alarmed investors.
US stock market futures are falling, suggesting that shares will drop when trading begins in three hours.
In London, the FTSE 100 is now in the red, down 30 points at 7652, having been slightly higher earlier.
Trump threatens to put tariffs on all Chinese imports
NEWSFLASH: CNBC are now broadcasting their full interview with president Trump (they only released the snippet attacking the Federal Reserve yesterday).
The new top line? Trump is threatening to hit China with a new wave of tariffs, which would drive up the cost of ALL Chinese imports into America, worth around $500bn per year.
Trump told CNBC’s Squawk Box show that “I’m ready to go to 500”, if China doesn’t bow to America’s complaints about its trade policies.
He added:
I’m not doing this for politics, I’m doing this to do the right thing for our country..... We have been ripped off by China for a long time.”
Trump denied that he is acting maliciously towards China, saying:
“I don’t want them to be scared. I want them to do well...I really like President Xi a lot, but it was very unfair.”
So far, America has imposed 10% tariffs on $34bn of Chinese imports (which could soon rise to $50bn). Another $200bn of goods (including food, chemicals and consumer goods) could be hit by 10% levies in September.
So far, China has announced reciprocal tariffs on America’s first wave of penalties. However, it couldn’t retaliate if Trump “goes to 500”, as it only buys less than $200bn of US goods each year.
Trump says he's 'ready' to put tariffs on all $505 billion of Chinese goods imported to the US https://t.co/4vZUssv20x pic.twitter.com/mI5SFvKWaB
— CNBC International (@CNBCi) July 20, 2018
Updated
Donald Trump should blame himself, not the Federal Reserve, for the strengthening dollar, argues Craig Erlam of City firm OANDA.
Erlam writes that Trump’s recent tax cuts have stimulated the US economy, at a time when it was doing pretty well anyway......
It’s quite clear to most people that part of the reason for the Fed raising rates at the current pace is the tax reform measures passed at the end of last year, when the economy was already running hot.
This is also partially responsible for the dollar rising against other currencies, particularly the yuan and euro, which has suffered further as the President has sought to start a trade war with both. Trump is not one to accept responsibility for such events and now appears to be actively trying to push the blame onto others in a clear attempt to halt the rise in the greenback, the strengthening of which could weigh on the economy and soften the impact of the trade measures he is taking against other countries.
Reuters points out that Donald Trump has made several public comments about the dollar’s strength since taking office....something most US leaders have avoided.
Trump shoots from the hip on the dollar and Fed, territory most presidents in the modern era usually avoided.
— Jamie McGeever (@ReutersJamie) July 20, 2018
Nice graphic from @SaqibReports on Trump's often contradictory dollar comments. https://t.co/vME5vJbt2N pic.twitter.com/DgGJV6vVmk
UK public borrowing hits 11-year low
Back in the UK, the long task of fixing the public finances continues.
New figures show that Britain borrowed £5.4bn to balance the books in June 2018, £800m less than in June 2017.
So far this financial year, the UK has borrowed £16.8bn; £5.4bn less than in the same period in 2017, and the lowest April-June borrowing since 2007 (before the financial crisis).
Mike Jakeman of PwC reckons this gives the government some ammunition to cut taxes or boost spending in the autumn Budget.
Long-term recovery in UK's public finances continued in June. Borrowing in April-June was £16.8bn, compared with £22.2bn last year.
— Mike Jakeman (@mikejakeman) July 20, 2018
(Look at the light blue bars)
Some wiggle room for Hammond likely in November budget. pic.twitter.com/LDHwFVS83z
Paul Donovan of UBS Wealth Management has a deliciously acerbic take on Trump’s attack on the Fed:
- US President Trump signalled unhappiness with Federal Reserve rate increases. This was in a TV interview, not a tweet, so it is not official administration policy. The decline of global inflation in the past quarter century was nothing to do with globalization, and nothing to do with technology. It was due mainly to central bank independence. Challenging independence is high risk.
- The Fed, even when run by a lawyer rather than a properly qualified economist, is not likely to alter policy direction. The Fed should tighten because deficit-financed tax cuts at a time of strong growth are unnecessary and need to be offset. However, US President Trump’s recent consumer tax increases [tariffs] may slow the economy and reduce the need for rapid rate rises.
Updated
Is Trump the new Erdoğan? (no, but...)
It’s important to emphasise that Trump’s criticism of the Federal Reserve is pretty unusual.
The whole point of central bank independence is that interest rates can rise or fall without political interference. That prevents governments from slashing borrowing costs to get a pre-election boom, creating an inflationary spike, forcing rates to go up again, slowing the economy, creating a recession....
Bart Hordijk, market analyst at Monex Europe, says Trump is acting more like the leader of an emerging market economy when he declares that he’s “not thrilled” by US interest rate rises.
Hordijk writes:
The US dollar sold off across the globe [after Trump’s attack] and the question on every FX trader’s mind is; is the US becoming the new Turkey?
“The answer seems, “no, but....”. The Turkish lira lost almost 30% of its value this year mostly because Turkish President Recep Erdoğan is firmly set against higher rates (just like Trump) and is attacking the independence of the central bank (just like Trump).
Erdoğan is notorious for criticising Turkey’s central bank, and calling for lower interest rates. Earlier this month he even put his son-in-law in charge of Turkey’s Ministry of Finance and Treasury.
Trump hasn’t reached that point (Jared Kushner has other duties, anyway). Hordijk says:
The big difference however is that the institutions in both countries widely differ and there are miles more of legal obstacles and checks and balances in place before Trump even gets close to have a direct say in the Fed’s interest rate policy.
Additionally Erdogan seems surrounded by a group of yes men, while Trump’s team sometimes still keep him in check, as evidenced by Deputy Press Secretary Sarah Sanders who went into damage control mode after the comments were made and reconfirmed Trump respects the independence of the Fed.
But even so, Trump’s decision to fire a warning shot at the Fed should worry the markets...
After starting a trade war, giving tax hand outs to the rich that will likely blow up the US fiscal deficit and antagonizing NATO allies while befriending despotic leaders, this latest action of Trump further establishes the pattern of his capricious, often short term focus.
That in itself is a scary observation and an understandable reason why the dollar sold off.”
Updated
President Trump has set “more cats among even more pigeons” with his comments about interest rates and the dollar yesterday.
So says Kit Juckes, foreign exchange expert at French bank Société Générale.
Juckes doesn’t believe the Federal Reserve’s independence is now in doubt.
And as long as [Fed chair] Jay Powell & Co respond to a strong economy and easy fiscal policy with measured policy tightening, they aren’t going to send bond yields or the dollar down on their own.
However, he also expects more fireworks if China allows its currency to keep sliding:
As long as the renminbi is falling in an orderly manner, there is little urgency for the Chinese authorities to counter it.
Whether or not China is wittingly undertaking a depreciation policy, the question will increasingly be on investors’ minds as the slide deepens. And the Trump Administration is unlikely to keep quiet for long either
Updated
The Trump administration is determined to push down their currency, says Neil Wilson of Markets.com.
A cheaper dollar would help US companies compete abroad, a key plank of Trump’s attempt to make trade ‘fairer’.
Wilson writes:
A clear pattern is emerging – Donald Trump wants a weaker dollar. Prior to his inauguration he said the dollar was ‘too strong’. Then earlier this year Treasury secretary Mnuchin echoed those comments when he openly questioned the strong dollar policy.
The Mnuchin effect lasted until the middle of April, but since then the dollar has been on the rise again, with the dollar index hitting 95, a level not seen since November last year.
When you look at the trade policies he’s pursuing, a weaker dollar makes sense. The only problem is that an all-out trade war, by making dollars scarcer, will force up the greenback against its peers.
Trump’s intervention raises the dangers of a full-blown currency war, says Jasper Lawler of London Capital Group.
He says China’s response - letting the yuan weaken sharply - is significant.
As Trump moaned about the strength of the dollar, the PBOC devalued the yuan by the most since 2016, sending a chill through the markets.
Interpreted as China’s response to the US trade war – the starting of a currency war- risk off is prevailing with traders selling out of equities sending Asian markets and European futures sharply lower. It was only a month ago when China denied that they would start a currency war following Trump’s action. A lot can change in a month under Trump.
Donald Trump’s criticism of the Fed came after the US dollar hit a one-year high against a basket of other major currencies.
The dollar has strengthened thanks to several US interest rate rises, and the prospect of more to come.
US interest rates are now 2% - up from just 0.25% after the financial crisis - with the Fed likely to push through two more quarter-point increases this year.
In contrast, eurozone interest rates are zero, while the UK Bank Rate is just 0.5%.
Yuan volatile after Trump attack
Trump singled out China for particular criticism last night, saying it was letting the yuan drop “like a rock”.
So he won’t be pleased by Beijing’s response – the People’s Bank of China let the yuan hit a new one-year low today, fixing the currency at 6.7671 per dollar.
That’s nearly 1% weaker than Thursday’s fix.
The yuan then tumbled lower in nervous trading, hitting 6.812 to the dollar. That prompted a reaction; Chinese banks began buying the yuan and selling dollars, apparently in an attempt to prop the currency up.
Updated
The agenda: Trump fires at Fed
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
With trade war fears mounting and Brexit looming, investors already have plenty to worry about. But Donald Trump has added a new anxiety -- currency wars.
Overnight, the US president launched a rare attack on America’s central bankers, revealing that he wasn’t happy with their plans to raise US interest rates.
Trump claimed that the Federal Reserve risked undermining all his good work strengthening the economy. He told CNBC that higher borrowing costs would drive up the dollar, especially as other central banks are keeping policy loose.
“I don’t really — I am not happy about it.”
“I don’t like all of this work that we’re putting into the economy and then I see rates going up.”
You could almost hear Fed chair Jerome Powell’s eyebrows rising sharply as Trump’s comments hit the wires. Central bank independence is a serious issue - policymakers are meant to navigate the economic squalls and storms free from political interference.
But Trump clearly doesn’t play by the rules, so traders now have to calculate whether White House pressure is going to influence the path of interest rates. And if so, is that going to set off a currency war?
Powell may feel Trump’s criticism is particularly misplaced, as the president’s tax-cutting agenda is putting pressure on the Fed to act, to prevent a dangerous inflationary bubble.
Trump insisted that Powell was a “very good man”, but even so the president “wasn’t thrilled” about the prospect of further interest rate hikes.
The White House tried to row back on Trump’s comments, insisting that he respected the independence of the Fed. But still, his intervention hit the markets, as CNBC explains:
Financial markets across the globe whipsawed on Trump’s comments.
The dollar index, which tracks the dollar’s performance against a basket of six other currencies, fell from a one-year high and traded just below breakeven. U.S. equities edged off their session lows, but remained lower on the day.
Also coming up today
June’s UK public finances are released this morning. The City predicts that Britain borrowed around £5bn to balance the books last month, much the same as in May.
- 9.30am BST: UK public finances for June
- 1.30pm BST: Canadian inflation figures
