Underskatta inte Kinas förmåga att svara med andra medel i handelskriget – CMC Markets

Michael Hewson från CMC Markets

Efter den senaste upptrappningen i handelskriget har Kina nu i det närmaste tullbelagt nästan alla varor från USAmed tullar. Kinas ammunition kan därmed vara på väg att ta slut, hävdar den amerikanske handelsministern Wilbur Ross. Det finns dock en risk att USA kraftigt underskattar Kinas förmåga att ta till andra åtgärder, skriver CMC Markets chefsanalytiker Michael Hewson bland annat i en analys.

Läs analysen i sin helhet nedan.

/webbred

 

European markets by and large managed to shrug off the latest escalation in the trade spat between the US and China, as China responded with 5-10% tariffs of its own on another $60bn worth of US imports, bringing the total amount of goods subject to tariff to $110bn, which is almost all of the $130bn that the US imported into China in 2017.

Asia markets followed on from that theme of resilience today with the Nikkei in particular outperforming in recent days, trading at six month highs, in the face of a weakening yen, and a Bank of Japan that remains committed to keeping rates very low for an “extended period”.

Investors may well think that this latest escalation may be it for now, while the US administration appears to be showing no signs of diverging from its view that trade wars are easy to win. Trade Secretary Wilbur Ross’s assertion that China is running out of bullets to retaliate may well be true when it comes to like for like trade tariffs, but it sorely underestimates China’s ability to respond with other measures.

China can afford to play a much longer game, particularly when it comes to the US electoral cycle. President Xi will be around long after Donald Trump has departed the White House. China’s economy may well be slowing down, but it is still growing at a decent pace, and the Chinese could make it very difficult for US companies operating in China by disrupting their supply chains, by implementing additional customs costs, or checks, with Apple being particularly vulnerable. It also has $3trn in FX reserves, while it could also squeeze US rates higher by paring down its holdings of US treasuries.

This story is likely to have a lot further to run with the extra costs of tariffs likely to weigh on revenue growth for companies as we head into 2019, with the prospect of additional escalations further down the line, with any progress on trade remaining unlikely before the US midterms, which may help explain why markets have started to rebound in the past couple of days, with markets in Europe opening higher this morning.

On the NAFTA front the restart of talks later today was welcomed by US and Canadian markets though whether we’ll see any prospect of a speedy resolution here remains debateable.

The pound has had a good run in recent days rising consistently against the US dollar, as the prospect of progress in Brexit negotiations has buoyed sentiment.

Recent comments from EU chief negotiator Michel Barnier that the EU was prepared to look at more technological solutions to the neuralgic Irish border issue in terms checks and controls has  raised expectations of a deal by the end of the year.

Today’s Salzburg summit of EU leaders will be another opportunity to see if some of the various “red lines” on both the part of the UK and EU get softened a little further. The looming deadline at last appears to be concentrating minds on both sides though Prime Minister May’s problems lie less with EU leaders than splits within her own party.

Away from Salzburg the pound is likely to face scrutiny through the latest inflation numbers with a weak reading potentially prompting some profit taking.

Last week UK wages started to show some signs of picking up strength with the three month measure to July rising to match its best levels this year at 2.9%. On a single month measure we saw a welcome rise to 3.1%, which suggests that the tight UK labour market is finally starting to see some measure of wage growth. All that is needed now is for headline CPI inflation to remain near its lowest levels of the year, currently at 2.4%, though we did see prices tick up slightly in July to 2.5%.

 

The recent rise in energy prices is likely to remain a concern in the short term, and for that reason it is unlikely that the headline number will show much of a dip. Expectations are for a return to 2.4%, and with headline inflation in both the EU and US both showing signs of softening it wouldn’t be too surprising if UK inflation were to show a similar softening.

Given the surprising weakness seen in the US and EU numbers there is a chance we could see a bigger dip, particularly since core prices have been falling at a much faster rate in percentage terms in recent months. Core prices in the UK have fallen from 2.7% at the beginning of the year to 1.9% now with an expectation we could fall to 1.8% in the latest numbers and an 18 month low.

Factory gate prices could also be a leading indicator of future inflation pressure, however they are also expected to soften a little as order books slow.

On the company’s front Kingfisher is in focus having seen off its closest competition Homebase, having performed slightly better in a difficult retail environment, with the UK business once again outperforming the French business. The company did report a much better than expected Q2 as a result of the hot weather, though it could be argued that some of the rebound was as a consequence of a weak Q1 where the bitterly cold weather suppressed its sales. Whatever the reasons for the rebound it is still welcome with UK and Ireland like for like sales at B&Q rising 3.6%, while Screwfix contributed a 5.5% rise in sales.

There was no Q2 rebound on the perennial drag, which has once again been the company’s French unit Castorama, which saw declines in like for like sales of 3.8%. It’s been a familiar story in this quarter as well with the French once again acting as the proverbial ball and chain, dragging the wider business down. The hot summer has been a boon for the UK business, while Screwfix has continued to perform well.

Profits were still lower from the previous year, coming in at £323m, down from £394m, an 18% decline. This is quite a decline and while CEO Veronique Laury is halfway through a five year turnaround plan, it is becoming increasingly apparent that further surgery will be needed on its underperforming French business with further store closures likely to stem the bleeding.

 

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