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China’s response to Trump’s new tariff threat panics stock market

U.S markets have the worst day this year
By Masao Suzuki |
August 5, 2019
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San José, CA - On Monday, August 5, China replied to Trump’s new tariff threat by calling off the purchases of U.S. agricultural products and weakening government support for the RMB, China’s currency. In response the RMB fell to 14 U.S. cents, meaning it will take slightly more than 7 RMB to buy one U.S. dollar. Soybean prices also fell, as China is the largest foreign buyer of U.S. soybeans.

The lower value, or depreciation, of the RMB will partially offset the impact of Trump’s new tariffs, or tax, of 10% on all remaining U.S. imports of goods from China. These tariffs, which include many consumer goods such as cell phones and other consumer electronics, baby items and toys that were not covered by Trump’s earlier tariffs. This tax is paid by U.S. importers and will be passed on to consumers.

The price drop in soybeans and other agricultural products such as cotton, where China is a major importer, will hit U.S. farmers already suffering from historic flooding driven by climate change. While the Trump administration is paying out billions to make up some of these losses, it does not cover the total cost to farmers.

Stock markets in the United States fell the most in one day this year, extending their losing streak to six business days. Hardest hit was the technology corporation-filled NASDAQ index, which fell more than 3%. Technology companies are deeply involved in trade with China, both importing and exporting. The headline Dow Jones Industrial Average fell almost 3%, or more than 750 points, while the broader S&P 500 Index also fell almost 3%. Stock investors feared that the escalating trade war would hurt economic growth and thus corporate profits and stock prices.

The growing fear of recession boosted the buying of bonds, which provide a fixed interest payment. Bond prices went up, driving the interest rate on the benchmark ten-year U.S. Treasury bond down to 1.75%. Just a year ago the interest rate on ten-year treasury bonds was over 3%. This means that longer-term bond rates are significantly lower than short term (six months or less) bond interest rates, which are near 2%. This so-called “inverted yield curve” is one of the best financial predictors of a coming recession.

The fear of recession slammed stock markets around the world, with most markets falling more than one and a half percent from Japan to Germany. Fear of a slowing economy also hit oil prices, which fell about one and a half percent.

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