Tensions escalated another notch over the weekend as the Trump administration undertook new retaliatory measures against China. After aiming at aluminium and steel products, then extending the tariffs to a broad range of Chinese products, the White House announced a new set of measures aiming at protecting “industrial significant technology”. The rules would prevent any company with at least 25% Chinese ownership to invest in US technology firms. Yet the final conditions are not written in stone, as the 25% threshold could be much lower. In addition, the National Security Council and the Commerce Department is also crafting a plan to prevent shipment of key technologies to the world’s second largest economy.
As expected, equity markets reacted negatively to the news with the Nikkei erasing 0.79% and the CSI 300 falling 1.34%. In Europe, the Eurostoxx 600 dropped 0.67%, while the SMI fell 0.78%.
In the FX market, investors took shelter into safe haven currencies with the Japanese yen benefiting the most. USD/JPY fell 0.40% to 109.53, while the Swiss franc’s gains were more modest (+0.10%). Overall, the greenback is benefitting the most following renewed tensions between the two largest economies. It is worth noting that the PBoC lowered the reserve requirement ratio to 15.50% from 16% on Sunday, in reaction to slowing growth and, obviously, potential negative effects from the trade dispute. The pressure on Chinese securities should accelerate further as investors continue to dump equities in anticipation of escalating tensions between the US and China.
By Arnaud Masset