Investors realise Trump’s pause was not the salvation it appeared
As China strikes back, reality sets in
SO FAR THIS year China has imported ten American films, including the zany “A Minecraft Movie”. But there is a limit to how much American drama anyone can stand. After President Donald Trump’s latest plot-twist—lowering the “reciprocal” tariff on most countries to 10%, while raising it on China to 125%—the China Film Administration stepped in. It said it would cut the number of Hollywood productions screened in the mainland. After all, Mr Trump’s tariffs would diminish the Chinese audience’s “favourable perception of American films”, it said.
More conventional retaliation soon followed. On April 11th China’s cabinet said it would match Mr Trump’s latest move, raising the tariff on American goods entering China to 125%. Given that no one in China will now buy American goods, it said, further retaliation will be unnecessary. If America continues to impose tariffs, “the Chinese side will pay no attention”. Even the government, in other words, wants to tear its eyes away from the horror show.
Investors may feel the same way. They had breathed a sigh of relief after Mr Trump’s sudden decision to cut tariffs on most countries and leave a 90-day gap for trade talks. The reprieve on April 9th lifted shares dramatically and halted a menacing spike in the yield on government debt. The bond market, which had been getting “yippy”, in Mr Trump’s words, turned into something “beautiful”.
Unfortunately, things quickly turned yippy yet again. Even with the pause, Mr Trump is still building a fearsome trade wall. America’s main equity benchmark sank by 3.5% on April 10th. The dollar resumed falling against other major currencies. And bond prices dropped once more, pushing up their yields.
In the vast and closely watched market for ten-year Treasury bonds, yields have risen by 0.5 percentage points in less than a week, to around 4.5%. Their climb is even more remarkable given the slowdown now expected for America’s economy. “It remains difficult to see the US avoiding recession,” noted economists at JPMorgan Chase, the country’s biggest bank, even after the reprieve. They fear the “ripple effects through supply chains from a sudden stop of Chinese imports”, the “hit to confidence” and the “ongoing policy chaos” in America.
Such a downturn would normally bring sharp cuts in interest rates, higher bond prices and, therefore, lower yields. It would also prompt a flight to the safety of American government debt. But past patterns no longer apply. “Key correlations are breaking,” noted Freya Beamish of TS Lombard, a research firm. “Go to your safe space. If your safe space was US Treasuries, then find a new one.”
Some of the bond sell-off may reflect the financial distress of the holders not the issuer. Highly leveraged hedge funds could be unloading Treasuries they keep as collateral to satisfy creditors. These institutions are not really betting for or against the American economy or its government; they are merely trying to profit from small gaps in price between bonds and similar financial instruments.
But other investors are expressing more fundamental doubts. They are demanding a higher “term premium”, an increased dollop of compensation for holding long-dated securities over shorter-term ones. That suggests they perceive America’s debt to have become riskier, which would also help explain the fall in America’s currency. Investors are discussing “de-dollarisation”. Gold, one of the oldest safe spaces, has become newly attractive, reaching fresh highs.
Where else can investors seek refuge? The Japanese yen resumed strengthening against the dollar. But shares on the Tokyo Stock Exchange fell by almost 3% by the end of trading on April 11th. Stockmarkets did better in India, Taiwan and Vietnam. These countries all benefited disproportionately from Mr Trump’s tariff pause (see chart). Vietnam, in particular, had faced a combined tariff of over 40%, weighted according to America’s imports last year. Now that average is “only” 16%, including the levy Mr Trump slapped on car parts, and the remaining “reciprocal” tariff of 10%.
Even though China now bears the brunt of Mr Trump’s trade war, its stockmarkets also did well on April 11th, closing slightly up. China’s yuan was also reassuringly steady after the country’s central bank set a slightly stronger benchmark rate for the currency, interrupting a series of small depreciations in recent days. This suggests China is not planning a sudden drop in the yuan to help its exporters weather the trade war.
Investors are waiting to see if that position holds. The world’s two biggest economies face a brutal and arbitrary partition. Goods will struggle to flow. Cross-border commerce will be costly and chaotic. And if the China Film Administration has its way, the two countries will not even watch the same movies any more. ■