The return of the trade war sparks panic in markets

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

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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.