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Things rapidly escalated after President Trump ratcheted up trade friction with China on August 1 by announcing 10% tariffs on the remaining roughly US$300bn of imports from China to the US, effective September 1. After markets first plunged realizing that the trade war was going to continue well into 2020, China initially responded by instructing SOEs to suspend imports of US agricultural products and then allowing the CNY to devalue past the 7.00 level for the first time since 2008, as the trade war became a currency war.
Almost immediately, in response to the CNY devaluation, the US Treasury designated China a currency manipulator for the first time in 25 years under section 3004 of the Omnibus Trade and Competitiveness Act of 1988. The escalation remains open ended with policy makers indicating the potential for further retaliation, although no further tariff or non-tariff actions have yet been specified.
China - Currency - Devaluation - Feedback - Loop
Meanwhile, China's currency devaluation has resulted in a negative feedback loop, in which higher tariffs lead to more yuan devaluation, leading to even higher tariffs, and even more devaluation, and so on, until some exogenous events breaks this cycle.
It is therefore not at all surprising that markets moved quickly to price in the ratcheting up of US/China trade tension, with the past 5 days resulting in one of the most volatile moves in the stock market this year, with the biggest one day drop of 2019 following by the most rapid three day rebound YTD. According to an FT analysis, the S&P 500 on Friday morning fell as much as 1.2%, marking the eighth straight session the index traded in an intraday range of more than 1 percentage point. It was the longest streak since a 29-day run that ended on January 10, when the market was convulsed by bouts of sharp selling and...
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