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  • Emerging Markets Debt Daily

    China Tariffs – Neverending Story?

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    August 02, 2019
     

    U.S. decision to impose a 10% tariff on the remaining USD300B of Chinese imports roiled markets. Russia was additionally hurt by the second leg of U.S. sanctions.

    President Trump’s unexpected decision to impose a 10% tariff on the remaining USD300B of Chinese goods sent risky assets into a tailspin
    . The consensus view is that the new tariff will deduct at least 30bps from China’s real gross domestic product (GDP) growth over the next twelve months (provided tariffs are to remain in place—President Trump can cancel them at any time). This means that authorities might open the stimulus spigot a little bit wider in the coming weeks. The focus now shifts to China’s response—either in the form of concessions or retaliatory measures that might affect rare earth metals and U.S. agricultural goods. A big concern outside of China is the tariff’s second-round impact on Europe’s growth (through trade channels).

    Russian assets are under additional pressure this morning following President Trump’s decision to impose the second leg of sanctions. These are so called “chemical” sanctions, related to Russia’s alleged use of chemical weapons in the 2018 attack on a former intelligence officer in the UK. Full details are not yet out, so there is uncertainty regarding the treatment of Russia’s new domestic bonds (OFZs). Other aspects—such as the prohibition of loans from U.S. banks to the Russian government or assistance from international financial institutions—are less important right now because Russia runs sizable budget surpluses and does not require such funding.   

    A strong jobs report in the U.S. was pretty much ignored by the market due to concerns about escalating trade tensions. Non-farm payrolls remained robust at 164K—in line with expectations. The rate of unemployment edged higher to 3.7%, but the participation rate also went up. Average hourly earnings rebounded slightly to 3.2% year-on-year. The report gave more credence to the U.S. Federal Reserve’s (Fed's) dissenters, like the Boston Fed’s President Eric Rosengren, who voted against this week’s rate cut.

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