Donald Trump's sudden escalation of trade tensions with China rattled global markets on Friday, triggering a sell-off in equities and a flight to government debt, even as jobs data offered reassurance about the resilience of the US labour market.
The swoon in leading financial indices was driven by the US president's announcement on Thursday that he would slap 10 per cent tariffs on a further US$300 billion ($458.7b) of Chinese goods in early September, in a pivotal week for the international economy.
Beijing issued a swift response on Friday, with China's commerce ministry vowing to retaliate with "necessary countermeasures" against the US move, suggesting it was more likely to dig in in the face of Trump's tariffs, rather than make concessions.
In a bid to shield the US expansion from commercial tensions and evidence of a deepening slowdown abroad, the US Federal Reserve on Wednesday cut its main interest rate by 25 basis points for the first time since the 2008 financial crisis.
But as Trump renewed his attacks on China, investors grew more worried about the prospects for growth and looked for the safety of bonds. US Treasuries experienced their biggest weekly rally since 2014, pushing the benchmark 10-year yield down by roughly 20 basis points over five days.
The yield on 30-year German government bonds plummeted into negative territory for the first time in history, briefly pushing the country's entire government bond market below 0 per cent, meaning investors seeking safety were prepared to face a guaranteed loss when holding the debt to maturity.
Equities were hit hard. Wall Street's S&P 500 fell 0.72 per cent, its fifth consecutive daily decline, while the Nasdaq Composite slid 1.32 per cent. Frankfurt's Xetra Dax 30 — home to a range of major exporters — fell 3.11 per cent. London's FTSE 100 lost 2.34 per cent.
The market reaction has raised expectations that the Fed will have to cut interest rates further and more rapidly than expected in coming months.
Speaking to reporters on Friday, Larry Kudlow, the director of the National Economic Council, shrugged off the renewed turmoil in the markets due to Trump's stance on trade. "I'm not concerned, our stock market has been incredibly strong," he said, adding that any impact on consumers would be "minuscule" and the "economic burdens" would fall "most heavily" on China.
Kudlow's confidence was bolstered by a relatively strong jobs report for July based on figures from the labour department. The US added 164,000 non-farm payrolls last month, in line with economists' expectations, with some job growth, of 16,000 positions, even in sectors like manufacturing that are particularly sensitive to trade. The unemployment rate was steady at 3.7 per cent, near all-time lows. Although the pace of job creation has been slowing, economists said there was no evidence of a slide towards recession.
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"Employment growth is trending lower, but the economy is still coping reasonably well amid concerns over weaker global growth and trade policy uncertainty," wrote Andrew Hunter, senior US economist at Capital Economics in London.
Trump's decision to threaten Beijing with more tariffs came after the president was disappointed by the outcome of talks between top US and Chinese officials in Shanghai held early this week. Among his complaints were China's resistance to purchasing US farm products and its lack of movement in stopping fentanyl flows to America. The proposed 10 per cent tariffs on US$300b of Chinese imports would come on top of 25 per cent tariffs already in place on US$250b of goods.
- Additional reporting by Peter Wells and Mamta Badkar.
Written by: James Politi and Michael Hunter
© Financial Times