Published: Wed, May 08, 2019
Markets | By Otis Pena

Markets Tumble Over Fears of a U.S.-China Trade War

Markets Tumble Over Fears of a U.S.-China Trade War

The People's Bank of China (PBOC), China's central bank, quickly published a statement on May 6 that it would lower the required reserve ratio of smaller rural banks to divert more liquidity to small, private companies, beginning May 15. Apple also fell 2.7%.

Another source familiar with the situation said Trump had reiterated to advisers in recent days that he would walk away from a trade deal with China if it was not strong enough. This would reverse a decision Washington took last February to keep it at 10 percent in the midst of trade talks.

A study from the Federal Reserve Bank of NY said that almost all costs of the trade war are being passed on to consumers.

Beijing said on Tuesday that Chinese Vice Premier Liu He will visit Washington on Thursday and Friday for trade talks, setting up a last-ditch bid to salvage a deal that would avoid a sharp increase in tariffs on Chinese goods ordered by U.S. President Donald Trump.

Trump's last-minute escalation highlights his administration's hard political position as it tries to fend off criticism that he has not been sufficiently tough on China.

On Monday, after President Trump threatened to raise the tariffs, the Dow fell more than 450 points, before recovering to close down 66 points.

But Lighthizer's comments dashed those hopes. The declaration sent stocks and oil prices lower on Monday.

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The Cboe Volatility Index, a measure of the 30-day implied volatility of the S&P 500 known as the "VIX" or the "fear gauge", hit a fresh high of 21.09 on Tuesday, its highest level since January 22. "I think what he's doing is the right thing to do, and I think it's going to benefit the country".

The Trump administration plans to introduce the first batch of duties on Friday. Geng did not say whether Vice Premier Liu would lead the delegation. He was originally scheduled to attend negotiations Wednesday through Saturday.

It's unclear whether the brinksmanship tactics from the Trump administration will help or hurt the prospects of a deal getting done quickly, something that investors want.

"Week after week, we've heard there has been progress and that a deal would be reached", said Kate Warne, investment strategist at Edward Jones. "It could disrupt the symbiosis between China and the United States", said Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh.

Jeffrey Gundlach, CEO of Doubleline, is not so sure. Exports to the United States, China's biggest foreign market, were down 13% at $31.4 billion.

Stock markets around the world have slumped after US President Donald Trump's unexpected threat to impose new tariffs on Chinese exports.

Alongside Secretary of the Treasury Steven Mnuchin, Lightizer accused China of reneging on certain agreement, saying "we have seen an erosion in commitments by China". Buoyed by those signs, as well as a more dovish stance on interest rates by the Federal Reserve, investors had furiously bought stocks and pushed the S&P 500 and Nasdaq to all-time highs last week. The Dow, meanwhile, is up 11%.

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