•The dollar held steady while the Australian dollar hovered near a more than four-month low on Wednesday, as traders awaited European and U.S. data for clues on whether the worst is over for the global economy.
The foreign exchange market showed little reaction to worse-than-expected growth in Chinese industrial output and retail sales for April that underlined the need for Beijing to roll out more stimulus measures to support the world’s second-largest economy.
The dollar was supported as trade issues remained foremost on investors’ minds after U.S. President Donald Trump on Tuesday insisted that trade talks with China had not collapsed.
The dollar index against a basket of six key rivals was largely steady at 97.514, having risen 0.2% during the previous session.
The market focuses next on euro zone and German gross domestic product (GDP) reports and U.S. retail sales and industrial product for April due later on Wednesday for pointers on the state of the global economy.
•The threat of the U.S.-China trade war escalating into something beyond nasty rhetoric and modestly effective tariffs for the most part has been dismissed by market participants and economists.
But the idea that the dispute could turn into something more is starting to become reality.
“The bottom line here is pretty simple if not altogether positive: markets are signaling that both the US and China have blundered into a minefield,” Nicholas Colas, co-founder of DataTrek Research, said in a note Tuesday. “The risk of a US recession is rising, sharply and quickly.”
Colas points to the various indicators on inflation, rates and concerns over the Chinese dumping U.S. Treasurys as indicators from the markets that the two sides should heed, much the same way as the Fed took cues that it was making a policy mistake by continuing to raise interest rates.
•The US-China trade war has escalated in recent days, with both countries announcing new tariffs on each other's goods.
US importers, not Chinese firms, pay the tariffs in the form of taxes to the US government, confirms Christophe Bondy, a lawyer at Cooley LLP.
Mr Bondy, who was senior counsel to the Canadian government during the Canada-EU free trade agreement negotiations, says it is likely that these additional costs are then simply passed on to US consumers in the form of higher prices.
"They [the tariffs] have a strongly disruptive effect on supply chains," he said.
China remains America's top trading partner, with exports rising 7% last year. However, trade flows to the US slipped 9% in the first quarter of 2019, suggesting the trade war is starting to bite.
Despite this, Dr Meredith Crowley, a trade expert at the University of Cambridge, says there is no evidence that Chinese firms have cut their prices in a bid to keep US firms buying.
"Some exporters of highly substitutable goods have just dropped out of the market as US firms have started importing from elsewhere. Their margins are too thin and tariffs are clearly hurting them.
"I suspect those selling highly differentiated goods have not reduced their prices, possibly because US importers rely on them too much."
According to two academic studies published in March, American businesses and consumers paid almost the entire cost of US trade tariffs imposed on imports from China and elsewhere last year.
Economists from the Federal Reserve Bank of New York, Princeton University and Columbia University calculated that duties imposed on a wide range of imports, from steel to washing machines, cost US firms and consumers $3bn (£2.3bn) a month in additional tax costs.
It also identified a further $1.4bn in losses linked to depressed demand.
The second paper, penned by among others, Pinelopi Goldberg, the World Bank's chief economist, also found that consumers and US companies were paying most of the costs of the tariffs.
According to its analysis, after taking into account the retaliation by other countries, the biggest victims of Trump's trade wars were farmers and blue-collar workers in areas that supported Trump in the 2016 election.
•President Donald Trump’s next trade battle could involve the U.S. slapping steep tariffs on auto imports from Europe — but that wouldn’t really be the White House’s ultimate goal, one expert said Wednesday.
Instead, such a move may well prove to be a “Trojan horse” for a bigger deal on agriculture, according to David Hauner, head of cross-asset strategy and economics for Europe, the Middle East and Africa at Bank of America Merrill Lynch.
Now that Trump has imposed more tariffs on Chinese goods, all eyes are turning to a potentially brewing trade war between the U.S. and Europe. The president had threatened as early as last year that he would slap a 25% tariff on car imports from the European Union. So far, however, the tariffs have not been imposed — but Trump is due to make a decision on European auto imports by May 18.
•Germany’s automotive sector could fall as much as 12% over “three bad trading days,” if President Donald Trump imposes tariffs on European car manufacturers, one analyst told CNBC.
Trump has until Friday midnight (Washington time) to decide whether to impose duties on car imports. This would likely hurt Germany, the EU’s traditional growth engine, given that it is one of the largest direct car exporters to the U.S.
The German stock market could fall as much as 6% and its automobile and components sector, specifically, could see losses of up to 12%, according to Christoph Schon, executive director of Axioma, a risk management solutions provider. He told CNBC over the phone that the losses could happen over a period of three trading days, or over five to 10 sessions.
Germany’s DAX is up by about 14% so far this year, while the overall European auto sector is higher by about 11% this year. Volkswagen and Daimler are up by around 7% and 15%, respectively.
Trump threatened to impose 20% tariffs on European cars back in 2018, arguing there’s a trade imbalance threatening the U.S.’s national security. The EU is the largest exporter of motor vehicles in the world, whereas the United States is the largest importer.
However, both sides have not yet started discussing a trade deal. The ongoing escalation in tensions between China and the U.S. has created more jitters in Europe, with analysts expecting Trump to keep a strong stance against the EU too.
The euro zone economy has lost steam recently, with weaker manufacturing and growth data. The European Central Bank (ECB) even had to cut its growth projections for the year back in March. Growth in the EU is highly sensitive to external shocks, due to its export-driven economy.
Some analysts believe Trump could decide this week to postpone its decision on car tariffs and focus on the ongoing talks with China instead.
“For the time being Trump will probably be busy with China and choose to extend Saturday’s deadline (European time) before escalating the conflict with the EU over cars and car imports,” Hense told CNBC.
“In any case, the impact on sentiment would be worse than the actual direct impact from the tariffs,” he added.
•China on Wednesday reported surprisingly weaker growth in retail sales and industrial output for April, adding pressure on Beijing to roll out more stimulus as the trade war with the United States escalates.
Clothing sales fell for the first time since 2009, suggesting Chinese consumers were growing more worried about the economy even before a U.S. tariff hike on Friday heightened stress on the country’s struggling exporters.
Overall retail sales rose 7.2% in April from a year earlier, the slowest pace since May 2003, data from the National Bureau of Statistics (NBS) showed. That undershot March’s 8.7% and forecasts of 8.6%.
The data suggested consumers were now beginning to cut back spending on everyday products such as personal care and cosmetics, while continuing to shun more expensive items such as cars.
•The German economy returned to growth in the first quarter, helped by higher household spending and a booming construction industry, preliminary data showed on Wednesday.
Gross domestic product (GDP) in Europe’s largest economy expanded by 0.4% quarter-on-quarter, the Federal Statistics Office said. This was in line with analysts’ expectations.
•Bank of Japan's Governor Haruhiko Kuroda: Will consider further easing if price momentum is lost. Rates, asset purchases are among easing options
However, he's not considering additional easing now, need to continue easing as price goal remains distant
•Oil fell on Wednesday after data showed a surprise rise in U.S. crude stockpiles and as Chinese industrial output grew less than expected in April, but prices were supported by mounting tensions in the Middle East.
Brent crude futures were at $71.06 a barrel at 0646 GMT, down 18 cents, or 0.3%, from their last close. Brent ended 1.4% higher on Tuesday.
U.S. West Texas Intermediate (WTI) crude futures were at $61.33 per barrel, down 45 cents, or 0.7%, from their previous settlement. WTI closed up 1.2% in the previous session.
Reference: Reuters, CNBC, FX Street
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