Prolonged U.S.-China Trade Talks Make Us Re-Think Trade
U.S.-China trade talks reopened last week in Shanghai for the first time since June. After negotiations stalled, President Trump suddenly tweeted his intention to slap another 10 percent tariff on $300 billion in Chinese goods. Chinese officials announced that they will halt purchases of U.S. agricultural products, while the People's Bank of China set the Chinese yuan close to 2 percent weaker, allowing it to trade below 7.00 (meaning one U.S. dollar now buys more than 7 yuan) for the first time in a decade. As a result, the U.S. Treasury dubbed China a currency manipulator.
As tensions escalated, so did risk aversion. Global stocks took a big hit and bond yields quickly declined, in sync with the conventional market reaction to "risk-off," where investors' appetite for risk wanes. In a reflection of the confusion, however, some investors actually felt more comfortable putting their money into less conventional asset classes such as precious metal (gold and silver) and even cryptocurrencies, as if those were safer!
Central banks elsewhere were also quick to respond with immediate and unconventional rate cuts. On Wednesday, the Reserve Bank of New Zealand cut its key rate by 50 basis points instead of 25 basis points, resulting in the New Zealand dollar tumbling more than 1 percent in one day. The same day, the Reserve Bank of India also made an unconventional rate cut of 35 basis points, larger than the 25 expected, stating that a smaller cut was insufficient. And the Bank of Thailand also surprised the market with an unexpected cut of 25 basis points, the first in four years. Pressure is expected to mount on the U.S. Federal Reserve, too, though Chair Jerome Powell has expressed willingness to be flexible on rate cuts.
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