The USA announced new 100 per cent tariffs on China at the end of last week, triggering a decline in both equity and fixed income markets around the world.
After fading from the headlines for a while, tariffs and the trade war flared up again late last week as U.S. President Donald Trump announced new 100 per cent additional tariffs on China. The tariffs were imposed in response to China’s announcement that it would curb exports of some rare earth minerals, and the markets reacted quickly. Equity and fixed income markets fell, risk appetite waned and uncertainty returned to investors’ minds.
After President Trump’s tariff announcement, the stock markets began to decline, and in the USA, the equity market fell the most since the tariff-fuelled plunge in April. The tech-heavy Nasdaq, for example, fell by more than three per cent on Friday – a significant change for a single day. Similar effects were seen in the fixed income markets, which turned downward. Credit spreads also rose, and the dollar weakened against the euro.
With the announcement, the volatility, i.e. price fluctuations, measured by the VIX index surged significantly upward. The final impacts remain to be seen. On one hand, volatility on one day often carries over to the following days, suggesting that the rise could continue into the early part of the week. On the other hand, President Trump may begin to ease the situation, which would ultimately leave Friday’s spike short-lived.
Over the weekend, the tension was eased by both sides. On Sunday evening, Trump said there is no need to worry about China. At the same time, both countries have communicated that they believe they are managing the situation better than the other side. The discussion is expected to continue at least until the potential meeting of the presidents, which is scheduled to take place in South Korea in two weeks.
The US government shutdown continues, already surpassing the usual duration seen in recent years. The shutdown is likely to continue for some time, as finding a solution still seems distant at the moment.
The effects on the economy are gradually beginning to show, and the challenges caused by the shutdown are expected to materialise soon. This week’s salaries will be delayed for millions of workers. Air traffic delays have also started.
The delay in salaries paid by the administration, if it continues, will also negatively affect consumers’ purchasing power, which has a significant impact on economic growth in the USA. Recently, it has also been suggested that delayed wages will no longer be paid retroactively. If that were to happen, it would have major effects on the economy.
Due to the shutdown, little new economic data has been received in recent weeks. Currently, estimates of economic growth rely on sources that have not been used much before. During the current week, the data calendar is full with US retail measurements and producer prices, among other things. However, there is still no final certainty about the publication of the figures. The third-quarter earnings season also begins this week, as several US banks release their results on Tuesday.
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