China’s response to Trump’s latest tariff threat could hit the US stock market even hard, especially if it targets American companies operating in China, says Oliver Jones at Capital Economics:

Chinese equities were amongst the worst performers today, with the Shanghai Composite dropping 1.8% after the US Trade Representative set out the $200bn of Chinese imports on which it intends to impose a 10% tariff. In contrast, the US S&P 500 has so far fallen by much less. But China’s reaction to the US tariffs could pose a far greater threat to the index in time.

China has yet to announce exactly how it will respond to the US announcement. It could implement further tariffs on its goods imports from the US (it matched the duties on $34bn of goods imposed by the US last week).

But it would not be able to fully match the scope of the US tariffs, since its goods imports from the US amounted to only $154bn last year. And it might be wary of imposing blanket tariffs, as some of the goods it imports from the US will be difficult to source elsewhere.

China can respond by other means, though. It has been suggested that it could deliberately weaken the renminbi – which fell by more than 0.6% against the dollar today. But while we forecast that the renminbi will fall a little further this year, we doubt that the People’s Bank will tolerate, or engineer, a steep fall in the currency. Our forecast for the end of the year is 6.80/$, compared to 6.67/$ now.

Instead, we suspect that China will target US firms operating in China directly...The operations of the majority-owned foreign affiliates (MoFAs) of US multinational enterprises (MNEs) in China dwarf those of their Chinese counterparts in the US, measuring either by sales or employment. And the sales of US MoFAs in China exceeded $350bn in the most recent year for which we have data, which is similar in scale to the US trade deficit in goods with China. So there is considerable scope for China to retaliate by penalising these firms, for example via much more stringent regulatory checks or consumer boycotts.

Despite falling today, US equities have generally proved surprisingly resilient to trade worries, while those in China have suffered considerably. But if China were to target US multinationals directly, then this might well change.

Heading into the close for European markets, IG’s chief market analyst Chris Beauchamp says the trade tensions have made investors more selective:

While stock markets remain in the red in Europe and the US, we are still seeing some buying, taking the likes of the Dow and the Nasdaq firmly off their overnight lows. It feels like we have been stuck in a ‘trade wars on, trade wars off’ for months now, and last night’s headlines about fresh US taxes on imports from China certainly fitted this game plan.

The big question for investors is whether their fear of the damage done by tariffs outweighs their expectations of further global growth. While we have seen the S&P 500 knocked back once again from 2800, it remains within touching distance of this level. Perhaps trade wars are losing their ability to shock, or perhaps investors are more convinced after last week’s minutes that the Fed does have their back if things really do turn ugly.

One thing is for certain, and that is that trade wars have made investors more selective about which index to pick – this afternoon sees a repeat of previous trade war-influenced sessions, as the small cap Russell 2000 outperforms its bigger brethren.

US crude stocks fell by a bigger than expected 12.6m barrels last week, the largest drop since September 2016, according to the Energy Information Administration. Analysts had been expecting a fall of 4.5m barrels.

Gasoline stocks dropped by 694,000 barrels, compared to forecasts of a 750,000 barrel decline.

But with Opec forecasting a fall in demand for its crude next year, down by 760,000 barrels a day to 32.18m, oil prices remained under pressure.

Already hit by the prospect of a trade tariff impact, Brent crude is down 2.3% at $76.98 a barrel.

Markets are still in the red, but the outlook is really dependent on how China actually responds to the new US threat of tariffs on $200bn of Chinese imports. Connor Campbell, financial analyst at Spreadex, said:

It was one of those days defined by one single, market-shaking event, the kind that actually end up being quite boring because of the rigidity of trading.

All that is to say little changed as Wednesday went on, Donald Trump’s threats to $200 million of Chinese imports keeping the markets a state of fear throughout the session. And while the Dow Jones didn’t fall quite as sharply as promised by its futures, the index still plunged 0.6% after the bell, taking it back below 24800 having hit 3 week peak on Tuesday.

The day’s losses were actually far worse in Europe. The DAX, perhaps spooked by the sniping between Trump and Angela Merkel, was the worst hit, the German index dropping 1.4%, with the CAC not too far behind with a 1.3% decline. The FTSE, meanwhile, was down 1.1%, just about keep above 7600 having crossed 7700 earlier in the week.

While the indices remained resolutely in the red, the forex markets completely flattened out as Wednesday progressed. The dollar, previously in the green as investors looked for a safe haven, shed its growth, reverting back to its starting positions against the pound and the euro.

Heading into Thursday and investors will be on high alert for a Chinese response, with any potential Beijing retaliation – or, equally, a lack of reaction – likely to be what drives trading in the second half of the week.

Commenting on the Canadian rate rise, ING economist James Smith says:

As was largely expected, the Bank of Canada resumed its tightening cycle on Wednesday with its first rate hike since January. But the big question going into this meeting was how policymakers would view the recent flare-up in trade tensions.

Well, although the statement is littered with references to tariffs – the word “trade” appears no less than six times – the message appears to be one of cautious optimism. Interestingly, it expects the impact of the steel/aluminium tariffs to be “modest” and still expects growth to average around 2% over the next couple of years. It also remains fairly upbeat about investment, despite trade concerns weighing “in some sectors”.

So with most core inflation measures now back around 2%, we suspect the Bank of Canada could strike again later this year – though it’s clear this is highly contingent on Nafta talks. Negotiations have noticeably stalled over the past month-or-so and it looks like talks could stretch beyond the US mid-term elections in November. This would mean a more prolonged period of uncertainty for Canadian firms. But on the flip-side, as long as the actual trade situation remains unchanged, Canada will continue to reap the rewards of an exceptionally strong US economy.

At this stage, we are forecasting another rate hike in the fourth quarter, although any breakdown in Nafta talks, or implementation of further tariffs, could easily change that.

Back in the US, and further signs of inflation even before the tariff effect.

Producer prices rose by 3.4% year on year, compared to expectations of a 3.2% increase. Bart Hordijk, market analyst at Monex Europe,said:

The US Producer Price Index has moved up 3.4% on a 12-month basis, the steepest growth since November 2011, beating expectations for the second month in a row.

As the most recent report concerns June, the impacts of the steel and aluminium tariffs that recently came into effect are still hard to discern. Increases in prices for services, for example, contributed the most to the higher than expected price growth, not a rise in prices in goods, as might be expected if companies were hoarding inputs en masse as they await the broadly announced tariffs to come into effect.

We know that when producers are forced to switch from cheap foreign inputs to more expensive domestic inputs, or face added tariffs to what they import, that prices paid for inputs are bound to increase. With producer prices already increasing at a multi-year record high pace, tariff induced inflation will only push producer inflation further into record territory. As producers need to pass the higher prices on to consumers, given that lowering margins is not always possible, then consumer prices may receive an extra boost from the side of producers.

Today’s PPI numbers thus indicate risks of an upward trajectory for the Consumer Price Index.

Donald Trump may be at the Nato meeting, but he is still preoccupied with tariffs:

The escalation of the trade dispute could cause a chain reaction of negative events around the world, says Nigel Green, chief executive of financial advisory group deVere:

It is going to lead to higher inflation in the US, as import tariffs raise the cost of imported goods while domestic producers find that they can increase their prices as foreign competition weakens. This means interest rates will be hiked and the dollar will go up.

China’s cheap goods have helped keep prices, and therefore US and global inflation, low. To counteract increasing inflation, the US Federal Reserve is even more likely to raise interest rates. A jump in rates will, of course, strengthen the dollar.

A stronger dollar also increases stress in emerging markets, many of which have borrowed heavily in recent years in dollars and who now find interest and capital repayments on these loans have shot up in local currency terms. In addition, emerging markets are particularly vulnerable to a downturn in exports resulting from a rise in quotas and import by the US, given that exports are a key driver of growth for many under-developed countries with China the most obvious example.

Trump’s trade war is a masterclass in self harm for the US and global economy.

China could retaliate against Donald Trump by launching a currency war, and allowing the yuan to weaken, argues Tom Milson, executive director at GWM Investment Management.

This would allow China to overcome being unable to impose retaliatory tariffs as it doesn’t import $200bn from the US each year (as explained earlier).

Milson explains:

The issue China has is that is unable to match the US in the value of imports it applies tariffs to, as the US imports more Chinese goods and services than the Chinese import from the US.

China will therefore have to be creative and could retaliate by using its currency to strengthen the value of US dollar, thereby pushing up borrowing costs in the US and making Chinese goods cheaper. It could also put in place measures that will make things difficult for US businesses such as increased regulations.

The US stock markets is expected to fall when trading begins, following the losses in Europe and Asia.

The Dow Jones industrial average is being called down 170 points, or 0.7%, at 24,750.

Artjom Hatsaturjants, research analyst at Accendo Markets, says Wall Street is fretting about Donald Trump (who is currently attending the NATO summit in Brussels).

After several days of calm, investors are back worrying about Trump’s latest threat, which would target $200bn of Chinese goods with 10% import duty.

This latest effort to ‘correct’ the Sino-US trade imbalance would take him half-way to his avowed $500bn ‘nuclear option’, targeting all Chinese exports to the US. His aggressive opener at NATO could also tee us up for a volatile rest of the week in Europe.

Economic growth in China and the US would suffer if Donald Trump imposes tariffs on $200bn of Chinese imports, on top of the $34bn of reciprical tariffs already implemented.

Louis Kuijs, head of Asia Economics at Oxford Economics, estimates that around 0.25 percentage points could be knocked off China’s growth rate next year, with more damage in 2019.

The US would also take a (smaller) hit, Kuijs estimates.

Kuijs also warns that “further escalation seems unavoidable”, unless Beijing and Washington can negotiate and dial down the situation.

It’s possible that criticism from US politicians could persuade Trump to step back, he adde.

Obviously, China cannot continue to retaliate with a proportionate response, given that its imports from the US are much lower than its exports to the country. But the new US tariffs are not a done deal either.

Although the Trump administration seems quite determined to take further steps, China’s leaders must still hope that low domestic support for a trade war in the US could delay and/or reduce the scale of further actions from the US.

Indeed, the latest actions quickly drew criticism at home, including from Orrin Hatch, the Republic chairman of the Senate finance committee.

It’s not just badger hair on the list!

The FT have spotted that human hair imported from China to the US could soon face a 10% tariff. Live eels, feathers and ‘beaver heads, tails and paws’ are also among the thousands of products facing new levies.

The trade war is coming to American bathrooms.

Personal deodorants, antiperspirants, bath salts, shampoos, eye and lip make-up, soap and manicure preparations are all on the new list released by the US Trade Representative last night.

So unless America backs down, these products will be around 10% more expensive this autumn.

Manure spreaders, shark fins, cod-liver oil, baseball mitts and bicycle speedometers are all also on the list of Chinese goods facing 10% tariffs.

So, weirdly, are “footwear of asbestos”.....

David Madden, market analyst at CMC Markets UK, sums up the situation:

Stock markets in Europe are firmly in the red as President Trump outlined plans to impose a fresh round of tariffs on China. The US president has lined up tariffs on $200 billion worth of Chinese goods as a way of showing Beijing he means business.

There will be a two month review process, and a hearing in late August. The threat of another round of tariffs has rattled investors, just as market confidence was picking up.

China will have to think creatively when it hits back against America’s tariffs.

Beijing cannot simply simply slap a reciprocal 10% tariffs on $200bn US goods, because it actually only imported $150bn of goods from America last year.

This chart shows:

In theory, Beijing could impose a higher tariff, to create the same economic impact. Or it could target the services sector - where America ran a surplus with China.

But if China does retaliate again, then Donald Trump could hit back with further tariffs. America imported around $500bn of stuff from China last year - giving Trump another $250bn of ammunition.

America could suffer economic damage if these new tariffs are imposed in September, says Cailin Birch, global analyst at the Economist Intelligence Unit.

He explains:

The proposed list of $200bn worth of goods includes a number of industrial inputs and components that would squeeze US companies’ supply chains and ultimately raise consumer prices.

And this, at a time when US exporters (particularly of agricultural products and manufactured goods including clothing and machinery) will be suffering from weaker external competitiveness, as a result of the tariffs imposed by China--as well as the by EU, Canada and Mexico, as part of a related dispute.

In some areas, China will continue to rely on (now more costly) US imports, including soybeans, which will raise inflationary pressures in China. In others areas, however, China will eventually divert its trade flows and source these goods from elsewhere.

Russ Mould, investment director at stock brokers AJ Bell, says investors are scrambling to put their money into safe assets toda:

“Plans by the US for an additional $200bn of tariffs on Chinese goods has caused investors to lose their appetite for risk and seek solace in more defensive sectors such as consumer goods and utilities.”

European stock markets are not a pretty picture this morning, as trade war worries hit stocks.

In London the FTSE 100 is now down by 105 points, or 1.3%. The Stoxx 600, which tracks the biggest companies in Europe, is down 1%.

Mining companies are among the top fallers in the City, dragged down by today’s tumble in commodity prices.

Trump’s decision to kick off the process of imposing tariffs on $200bn of Chinese goods has clearly hit confidence.

Fiona Cincotta, senior market analyst at City Index, explains:

Things were going so well.

After four days of straight increases in US stock markets, mainly prompted by the looming earnings season which is expected to show a very respectable growth of about 20% this quarter for the S&P 500, stock markets in Asia, Europe, the US and most of the major commodities were plunged into red this morning, courtesy of the latest US trade tariff decision....

In commodities the board was also almost uniformly red with declines in Brent Crude, gas, precious metals and wheat prices. Worse hit was copper, trading down 3.2% on the day.

With China being the single biggest global buyer of base metals, frequently accounting for about half of global trade in the likes of copper, aluminium, nickel and zinc, investors were spooked by the intensifying trade tit-for-tat.

Not only will this be negative for China’s demand for metals but will also affect FTSE heavyweights such as Rio Tinto, Glencore and BHP Billiton and a whole host of medium sized and smaller metals producers.

America is now conducting a two-month consultation on these proposed tariffs, meaning they could be imposed in September.

Paul Donovan of UBS points out that tariffs are actually an additional sales tax, as they make imports more expensive. He says:

President Trump once again prepared to lower the yoke of additional taxation onto the shoulders of US consumers.

Commodity prices are being hit hard today, with zinc dropping by 6% in Shanghai and copper down around 3.5%.

Traders are worried that these new tariffs will dent demand for metals, especially if Chinese growth is hit.

Our Beijing correspondent, Lily Kuo, reports that China has heavily criticised America’s move.

She writes:

In Beijing, Li Chenggang, assistant minister at the ministry, said at a forum in Beijing that the latest US proposals interfered with the globalisation of the world economy and that China’s support for a multilateral trade system would not change.

An English-language editorial in the state-run China Daily that has now been taken down said, without mentioning the new tariffs. “China has no option but to fight fire with fire. It has to resolutely fight back while taking proper measures to help minimise the cost to domestic enterprises and further open up its economy to global investors.”

Another editorial in China Daily said, “If Trump launches an all-out trade war, the US economy and society may not be able to withstand the impact of countermeasures from China and other economies.”

More here:

Duncan Innes-Ker of the Economist Intelligence Unit points out that America is now targeting low-value manufacturing goods.

This could drive production out of China, perhaps to Vietnam and Mexico.

America’s new planned tariffs could have a serious impact on China’s factories.

China exports around $500bn of goods to the US each year. If these latest tariffs go through, then around half those goods will arrive with additional levies slapped on them.

That could hurt demand for Chinese goods in America, creating damage in China and beyond.

As Zhu Huani of Mizuho Bank put it:

“Given the magnitude and breadth of the tariff list, the impact is expected to ripple through supply chains and cause collateral damage on regional economies”.

Britain’s FTSE 100 index has fallen 60 points, or 0.8%, to 7630 in early trading.

Other European markets are also in the red, as trade war fears ripple across the trading floors again.