A series of waivers of US steel and aluminum tariffs eased trade worries on one front but escalated them on another on Thursday as stock markets were battered. The yen was the top performer while the Australian dollar lagged in a classic risk-off move. Japanese CPI is due up next. The Premium DAX 30 short was closed at 11980 for 360 pt-gain.
The US trade position is increasingly clear. Levying tariffs against some of its closest trading partners was part of a negotiating strategy. They were a threat designed to bring them to the table, where the US gave them an ultimatum: take our side against China or face the consequences.
Leaks from EU tariff negotiations showed that support for the US against China at the WTO stood among the conditions. At the same time, the US hit China with fresh tariffs Thursday on imports of intellectual property.
So what had looked like a US-against-the-world trade spat may be the-world-against-China, led by the US. That puts the China in a tough spot but leaves them with several options: 1) play the long game by accepting the tariffs and wait for Trump to leave office, 7 more years if necessary. 2) Try to sway countries on the US side. 3) Try to hurt the US in swing states head of the US mid-terms.
At the moment, the third option is the most likely but markets will be watching China's next move very closely. The S&P 500 closed on the lows and narrowly below the worst levels of March. Technically, the picture is deteriorating. It's much the same in the yen crosses – many of which never recovered from the plunge in February anyway.
China's getting warmed up
The ink is barely dry on Trump's tariff attack and China is already setting to plan reciprocal tariffs on $3 billion of US imports (agriculture and steel) in the form of 15% in tariffs.
Going into the weekend, the market will be wary of negative headlines and risk aversion will probably continue. Yen traders will we watching for headlines from Japanese CPI at 2330 GMT. The consensus is for a 0.5% y/y rise ex-fresh food and energy.