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Why Is China’s Punch Back Good For Risk Assets?

By Kurt Osterberg · On April 5, 2018

China’s proposal spurs risk appetite, will USD/JPY break 107? China’s proposal to match the scale of proposed US tariff actually paved way for further negotiation to fill the gap, instead of ending with an escalation of trade tension; that said, stocks market may be overreacted initially.

Any further negotiation may not be limited to trade terms, but include some requirements by US to urge China to open up more sectors and financial services to the US companies.

American companies may also pressure the Trump’s administration to cease the actual implementation, as retaliation hurts.

Offshore yuan, a more freely traded RMB and better gauge of sentiment on the health of Chinese outlook, is now trading premium to onshore yuan. This showed that risks of further escalation is contained for now.

Other than FX market, US Treasuries was also relatively quiet overnight. This means there wasn’t much new flows into safe haven.

US import price has been rising since early 2017, mainly due to weaker dollar; tariff could push price even higher, which will worry Fed and investors.

If US jobs report tomorrow shows a lower unemployment rate and faster wage growth, which is possible, stocks market could be in a panic again.

Farming states were one of Trump’s key supports in the 2016 election, hence it is not wise for Trump to damage their interests if China is to counter his tariff measures.

For major products targeted by Chinese tariff, China can purchase soybean from Brazil, and jets from Europe.

Impact on actual growth is limited to both nations (less than 0.5% in both countries’ GDP), but it may lead to a slower output across the board and lower confidence on economic outlooks due to rising tension between the two largest economies in the world.