Dollar, bonds plunge as Trump turns up rhetoric

Roman Schwartz
July 23, 2018

US stocks inched lower Friday as bond yields jumped, a shift that helped banks but hurt companies that pay big dividends.

Most Asian markets were higher yesterday despite signs that China and the USA were preparing to impose more tariffs on each other's products.

Investors flocked to bellwether stocks in the electronics and financial sectors, leaving the stocks of small or medium-sized companies vulnerable to selling pressure, they added. The S&P 500 index was virtually flat for the week while the Russell 2000 index, which is made up of smaller companies that do more business inside the USA, rose 0.6 percent.

US PRESIDENT Donald Trump said on Friday he is willing to hit all Chinese goods imported to the United States with tariffs if necessary.

Last month, the Fed raised its benchmark rate for a 2nd time this year and projected 2 more increases in Y 2018.

By sheer dollar volume, the Chinese won't be able to come close to the U.S. in a tit for tat battle.

Ironically, this plays into China's short term strategy as a de-valued Yuan will help China to equalise tariffs in its trade with the USA thus making numerous new protectionist barriers essentially toothless against American businesses and consumers buying these "de-valued" goods with an increasingly strong Dollar. But it's something investors will have to think about.

"I'm not doing this for politics, I'm doing this to do the right thing for our country", Trump said.

Moody's Analytics estimates that if the tariffs were imposed on autos and most Chinese imports and other countries retaliate as expected, annual USA growth would slow by 0.5 percentage point by mid-2019.

In Taipei, the TAIEX on Friday closed up 96.73 points, or 0.89 percent, at 10,932.11 on turnover of NT$164.46 billion (US$5.35 billion).

Short-term bond yields inched higher.

Benchmark 10-year US notes US10YT=RR last fell 14/32 in price to yield 2.8968 percent, from 2.847 percent late on Thursday.

Long-term bond prices dropped. The MSCI Emerging Market Index gained 1.1 percent. The euro increased 0.8 percent to $1.1729.

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Members instead approved language addressing so-called sanctuary cities, the Supreme Court, sex education and religious persecution in Burma.

"In such a conflict situation, no one can buy auto stocks, or even hold them", said Arndt Ellinghorst, an analyst at Evercore ISI. The British pound strengthened 0.9 percent to $1.3136.

But General Electric sank 4.5 percent after it reported a 29.7 percent drop in second-quarter earnings to $615 million on continued power industry weakness. GE, which has been selling and splitting off businesses, also cut its forecast for how much cash its businesses will generate. Trump said on Twitter the European Union was among those that had been manipulating their currencies, after earlier saying in an interview on CNBC the U.S.is ready to impose levies on all $505 billion of Chinese imports into the U.S.

In addition, President Trump has told the Commerce Department to investigate whether imported autos and auto parts threaten America's national security - the same justification the president invoked to impose tariffs on steel and aluminum. With US production also at record levels a global trade slowdown could ripple out into lower demand, and with the US President bemoaning current oil price levels it is not beyond the realms of possibility that we could see an SPR release as the Trump administration tries to put a lid on gasoline prices.

In reality though, when it comes to the Yuan's recent fall against the Dollar, Trump largely has himself to blame for creating an atmosphere of negative speculation against the Chinese economy due to his tariffs and threats of many more tariffs. The gains in metals capped a turbulent week across the industry as traders extended a month long selloff kicked off by fears that the trade tensions between China and the US will hurt demand for industrial materials.

The Chinese yuan weakness achieved through higher U.S. dollar-Chinese yuan fixings, while consistent with the People's Bank of China's (PBoC) easing bias, remains an unlikely retaliatory tool given the ongoing risk of capital outflow, in our view.

A weaker Dollar will make exports cheaper and imports more expensive. -Chinese tariff fight that prompted suggestions Beijing might weaken the yuan to help exporters.

China accused the United States of starting the "largest trade war in economic history".

OIL: Benchmark U.S. crude added 1.4 percent to $70.46 a barrel in NY and Brent crude, used to price global oils, gained 0.7 percent to $73.07 a barrel in London.

Wholesale gasoline rose 1.2 percent to $2.07 a gallon.

The Bloomberg Dollar Spot Index slumped 0.76 percent, the most since March 21.

OVERSEAS: Germany's DAX lost 1 percent and France's CAC 40 slid 0.3 percent.

Gold rose 0.6 percent to $1,231.10 an ounce.

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