The return of the trade war sparks panic in markets

Donald Trump’s latest skirmish in his trade war with China has sent stockmarkets tumbling. John Stepek looks at how China could respond, and what it means for the global economy and for your money.

Donald Trump © Getty Images
Donald Trump has fired fresh rounds in the trade war with China

Before I get started this morning, here's an urgent reminder if you want to buy tickets for the MoneyWeek Wealth Summit (and you should), then you only have until midnight tonight to get hold of them at the knockdown early bird rate.

After that, prices go up. So book now. I'll remind you again at the bottom of this message, in case you forget. But I'd suggest you go and book right now. We're living in unusually turbulent times for investors and getting first-hand views from some of the biggest names in finance could be the best investment you make all year.

Today's Money Morning points to a case in point Donald Trump's quest to "win" at the protectionism game.

The trade war rears its ugly head again

On Thursday, US president Donald Trump said (or rather tweeted) that starting from 1 September, he would put a 10% tariff on the $300bn-odd of Chinese goods that isn't already subject to tariffs. On Friday, China said it would retaliate.

It's all a bit of a turnaround, given that markets had been starting to feel hopeful about a deal again.

The fear of an escalating trade war was enough to offset any lift from an otherwise decent showing for US employment. In June, the unemployment rate remained at just 3.7%, 164,000 jobs were added to employers' payrolls. And, importantly, wage growth came in at 3.2%.

In other circumstances, as Michael Hewson of CMC Markets points out, these would be solid figures. The sort that would have the market embracing a "Goldilocks" economy not too hot, not too cold, weak enough for the Federal Reserve to keep cutting, but strong enough to avoid recession.

But not this time.

To get an idea of just how nervous investors have become, investors are now so keen to stick their money into 30-year German government debt that Bunds now trade on negative yields (in other words, if you buy now and hold until maturity, you are guaranteed to lose money).

That's never happened before. For someone who is apparently keen to have a rallying stockmarket come the next election, Trump is going about it in an interesting way.

The big risk if Trump pushes China too far

So what's going on?

It's hard to say. John Authers over at Bloomberg points out that Trump's timing is intriguing. Earlier in the week, the Federal Reserve, America's central bank, was not quite aggressive enough with its rate cuts for Trump's liking. When he threatened to impose more tariffs, market expectations for future rate cuts shot up. The market now believes there is no chance of the Fed failing to cut in September.

However, while it's sometimes hard to tell what's going through Trump's mind, the idea of escalating the trade war simply to get the Fed to cut interest rates does seem a bit extreme, especially as the Fed appears to be pretty easily swayed in any case.

And the fact is that this could be very counterproductive.

One weapon the Chinese potentially have is their currency. Devaluing the yuan in order to compete with the US (a 10% tariff doesn't make much difference to demand for your goods, if your currency falls by 10% against the US dollar at the same time) becomes an ever more tempting option if you feel the other side if not playing fair.

The line in the sand to watch here is the 7 mark. Once a US dollar buys more than 7, that suggests that China has decided to let the currency go or to drive it lower, perhaps.

A devalued Chinese yuan would export deflation all over the world. No wonder there are so many negative-yielding bonds flooding global market right now.

Will it come to that? I don't know, but I can tell you that we'll be keeping a close eye on the yuan in Saturday's Money Mornings.

And again before I go, as promised above, another reminder about the MoneyWeek Wealth Summit on 22 November. The trade war and the role of the yuan are bound to be topics of discussion and there will be plenty of other meaty political subjects to talk about.

Among others, our guests include financial historian and analyst Russell Napier, British investor and entrepreneur Jim Mellon, former pensions minister Sir Steve Webb, MoneyWeek's Merryn Somerset Webb, Dominic Frisby and David Stevenson, and a host of other big names who've all agreed to join us in the last couple of days (more on that very soon).

There's a great deal to talk about, and many of the biggest issues hitting the headlines right now are likely to be reaching their denouement around that time (Brexit is the obvious candidate here but there may be others). So you don't want to miss it.

But to get the best price, you have to book today! The early bird offer closes at midnight tonight. So don't delay any longer, get your seat right now by clicking here.

Recommended

The currencies to bet on this year
Currencies

The currencies to bet on this year

The US dollar could be set to weaken this year, while the euro, Canadian dollar and the Swiss franc could be good bets for optimistic traders.
17 Jan 2020
The charts that matter: precious metals and bitcoin swoon
Global Economy

The charts that matter: precious metals and bitcoin swoon

As gold and bitcoin both slide, John Stepek looks at what else has happened this week in the charts that matter the most to the global economy.
28 Nov 2020
Bill Ackman: beware of short-term market volatility
Investment gurus

Bill Ackman: beware of short-term market volatility

Bill Ackman, founder of the Pershing Square hedge fund, is upbeat on prospects for markets in 2021, but is worried about short-term volatility as coro…
27 Nov 2020
More good news as AstraZeneca finds a third Covid vaccine
Biotech stocks

More good news as AstraZeneca finds a third Covid vaccine

Another week, another Covid-19 vaccine. This one from AstraZeneca and Oxford University is homegrown and ready to roll out fast. Matthew Partridge rep…
26 Nov 2020

Most Popular

The next 20 years: five new technologies on the horizon
Global Economy

The next 20 years: five new technologies on the horizon

What will everyday life be like in two decades’ time? Matthew Partridge peers into his crystal ball.
12 Nov 2020
This week’s rally in value stocks is just the beginning
Value investing

This week’s rally in value stocks is just the beginning

The arrival of a vaccine this week saw huge gains in the markets and investors switching out of big-tech growth stocks and into “value” stocks in more…
13 Nov 2020
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
13 Nov 2020