U.S. equities are opening sharply lower this morning, continuing the selloff in Asian and European equities. The risk off sentiment that is characterizing the markets were driven by a couple of factors—U.S. warships in the South China Sea, North Korean live-fire military exercises and threats from President Trump to escalate tariffs on China.
Focusing on tariffs, President Trump indicated that the 10% tariffs that the U.S. has on $200 billion worth of imports from China could rise to 25% as of Friday, May 10. According to the President’s tweet, “the Trade Deal with China continues, but too slowly, as they attempt to renegotiate.”
While recent headlines around trade talks have been constructive, we have been flagging the difficult nature of U.S.-China trade talks. Unlike trade talks with other trading partners, which mainly revolve around terms of trade, trade talks with China involve more structural issues that are much harder to solve. While it’s unclear what the Chinese are attempting to renegotiate, it is likely that the removal of existing tariffs and/or these key structural issues (IP theft, forced technology transfer) are at the heart of the matter. Ultimately, the net result is increased uncertainty.
It remains unclear whether or not the president will go through with his threats as the threat of tariffs to win concessions is a familiar negotiating tactic and history has shown a willingness to extend deadlines. Additionally, there have been conflicting reports over whether the Chinese trade envoy will still travel to the U.S. for talks scheduled to start this Wednesday. Even if the Chinese do continue with plan talks, Beijing would not want to give the impression of giving in to U.S. pressures while negotiating under threat. In short, risks have risen and the evolution of events over the next few days have taken on increased importance. | |
| HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: | |
- The PBoC announced a targeted required reserve ratio (RRR) cut for small and medium sized banks effective May 15. While we acknowledge the proximity of this cut to President Trump’s tariff threat, this RRR cut is consistent with the continued implementation of previously announced polices.
- Final Eurozone services and composite PMIs came in stronger than expected with services PMI coming in at 52.8 and composite PMIs finishing at 51.5.
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