China Retaliates Against U.S. Tariffs – Stock Market Plunges In Worst Day of 2019

Aug 5, 2019
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Today has brought the next chapter in the seemingly never-ending tit-for-tat trade war between the United States and the Peoples Republic of China. China responded to the latest round of tariffs threatened by the Trump administration, only China didn't merely hit back with a threat, it took real action in the form of devaluing its currency in relation to the greenback. As a result, stock markets collapsed today in the worst day of the year.

China allows yuan to slip to fight U.S. and halts ALL American agriculture purchases

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China's central bank allowed the yuan to slip to below 7 yuan per dollar, a level that is psychologically significant according to some analysts. China lowered its daily reference rate early Monday morning which came as a direct response to the recent elevated round of tariffs discussed by the U.S.

When a nation's currency devalues relative to other currencies it becomes cheaper to export from that country - and conversely more expensive to import goods. At the end of the day, while this hurts China in some ways, it means that Chinese goods will be more attractive in the global market versus U.S. goods. It also means that China could force more exports into the U.S. and that will of course further increase the trade deficit which is currently at a five-month high.

This is a rather stunning move by China as the magical 7:1 yuan to dollar ratio has been the unspoken rule for years now. China has artificially propped up its currency for years by both private and public means, one method being the bulk repurchase of yuan by state-owned banks. By now devaluing its currency its sending a striking message to Washington that it too, can play hardball. Chris Krueger is an analyst at Cowen and he said as much in a note to clients, “Overnight, Chinese government retaliated against new U.S. tariffs, and it’s designed to get the President’s attention,”

China is playing to its strengths with its move to devalue the yuan. It buys a lot less American goods than the U.S. does China's, but it can at least control the cost of its goods to some extent. Trump has been demanding China purchase more from the U.S. to help balance the deficit, and China is somewhat organically going to force things in the opposite way with cheaper Chinese exports.

Again playing to its strengths, China has halted all American agricultural exports coming into the country, and this hits Trump right in his voting base. We'll sidestep any political commentary beyond saying the Chinese are exercising some well-thought-out strategy here, yet they certainly don't want to hinder their own pork market which relies on soybean imports from the U.S. However, they must feel that going directly after Trump's constituency will help them more in the long run. Perhaps they feel it will increase pressure on Trump from within.

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Markets run in fear as trade war continues to heat up

Of course, this isn't good news for investors and the global economy as a whole. China is the largest trading partner of the United States and the trade war between the two sends chilling messages throughout global markets.

Immediately this morning a sell-off began and continued throughout the day. The DOW plunged over 760 points and the S&P 500 dropped about 3 percent. Overall the market suffered its worse day so far for the entire year. Analysts have universally condemned the tariffs and the resulting action from China.

"We have a trade situation that is going off the rails," Peter Boockvar, chief investment officer at Bleakley Advisory Group, said Monday. "The policy of using tariffs as a tool to address our legitimate beefs [gripes] with the Chinese has failed miserably.

It's not surprising that investors sold off shares of companies to turn around and jump into 10-year Treasury notes as a way to mitigate some long term risk.

"The escalating US-China trade war will certainly be bad for the US economy. How bad is almost impossible to calculate," said Art Hogan who is a chief strategist at National Securities Corporation.

Tech stocks were especially hard hit today with NVIDIA (NASDAQ:NVDA), AMD (NASDAQ:AMD), MU (NASDAQ:MU), and IBM (NYSE:IBM) all taking sizeable dings. It'snot surprising that all the aforementioned companies have close ties to China with either customer bases and/or supply chains located there.

Although none lost more than Apple (NASDAQ:AAPL), which lost $42 billion dollars in market cap with its 5.2 percent drop. For perspective, AMD is worth about $30 billion in total!

 

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