Markets slide as US-China trade talks begin with Trump call for ‘level playing field’ – as it happened

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3.33pm BST

The latest US monthly jobs figures are out on Friday, and there could be a recovery from the weak (103,000) number seen in March:

Markets continue to suffer on worries about the potential for a trade war between the US and China. Connor Campbell, financial analyst at Spreadex, says:

Despite a lack of news surrounding the ongoing takes between the US and China, the various aggressions reported last night – including news that China has stopped by soybeans from the US, with the latter potentially set to impose restrictions on certain Chinese telecommunication companies selling equipment in America – have reignited fears of a trade war.

It’s clear that investors aren’t confident about the outcome of the day’s delegation get-together. The Dow Jones plunged more than 250 points after the bell, diving below 23700 for the first time in a month. Granted the Dow is also dealing with a fairly hawkish Fed statement from Wednesday night, one that kept up the dollar’s hopes of 3 (or even 4) more rate hikes in 2018.

With little else to go on, the European indices took their cue from the US losses. The CAC slipped 0.3%, while the DAX dropped 0.6%, the latter abandoning the 12800, 3 month highs struck on Wednesday. As for the FTSE, the UK index shed 50 points, shying away from 7550 to return to 7500 for the umpteenth time this week.

Mixed signals from the US service sector

Two surveys of the US service sector have come to different conclusions about the state of this part of the economy.

The ISM non-manufacturing PMI dropped from 58.8 in March to 56.8 in April, below expectations of a level of 58.1. The employment index dropped from 56.6 to 53.6, the lowest since April last year.

But earlier the Markit service sector PMI rose from 54 in March to 54.6 in April, slightly better than the initial reading of 54.4.

Even so, any reading over 50 shows expansion so these figures are unlikely to alter the future course of US interest rates.

China can withstand a trade war longer than the US, says Wendy Cutler, Asia Society Policy Institute vice president and former acting deputy U.S. trade representative. She was speaking to CNBC:

Wall Street opens lower

Worries about trade tensions as the US and Chinese delegations meet in the wake of Trump’s tariffs have seen US markets open lower.

The Dow Jones Industrial Average is down 170 points or 0.7% while the S&P 500 opened down 0.29% and the Nasdaq Composite off 0.51%.

Among the fallers is Tesla, down 7.5% after the bizarre post-results analysts call held by Elon Musk.

Could Donald Trump’s actions on trade and tariffs see a repeat of the 1930s slump? A group of experts certainty think it could happen:

Over a thousand economists have written to Donald Trump warning his “economic protectionism” and tough rhetoric on trade threatens to repeat the mistakes the US made in the 1930s, mistakes that plunged the world into the Great Depression.

The 1,414 economists, including 14 Nobel prize winners, sent the letter on Thursday amid an escalating row over trade between the US and the European Union. Trump has imposed tariffs on steel and aluminium imports but has granted temporary reprieves to the EU, Australia and other countries.

“In 1930, 1,028 economists urged Congress to reject the protectionist Smoot-Hawley Tariff Act,” the authors write, citing a trade act that many economists argue was one of the triggers for the Great Depression.

“Today, Americans face a host of new protectionist activity, including threats to withdraw from trade agreements, misguided calls for new tariffs in response to trade imbalances, and the imposition of tariffs on washing machines, solar components, and even steel and aluminum used by US manufacturers.

“Congress did not take economists’ advice in 1930, and Americans across the country paid the price. The undersigned economists and teachers of economics strongly urge you not to repeat that mistake. Much has changed since 1930 – for example, trade is now significantly more important to our economy – but the fundamental economic principles as explained at the time have not.”

The full story is here:

US trade gap narrows but China deficit up so far this year

With immaculate timing, as the US and Chinese delegations meet, the Commerce Department has released the latest international trade figures.

Overall the trade gap narrowed in March from $57.7bn in the previous month to $48.9bn. This was better than the expected deficit of $50bn, helped by exports increasing to a record high following a surge in deliveries of commercial aircraft and, yes, soybeans.

ustrade2may

As for the deficit with China, the March figure fell from $29.26bn to $25.88bn.

BUT: the year to date figure for the trade gap with China is up sharply, from $78.8bn to $91bn.

Updated

By sending so many senior officials to China, the Trump administration may actually have lowered the chances of a breakthrough.

That’s because the delegation don’t really agree with each other about trade, making it harder to reach an agreement with Beijing.

For example, commerce secretary Wilbur Ross has blamed ‘evil practices’ by China for the trade gap with America, and vocally backed Donald Trump’s tariffs.

US trade delegation to China

But Larry Kudlow, the newish head of Trump’s economic council, has previously warned that tariffs are effectively tax rises and will hurt US companies (this was before he joined the White House).

US trade delegation to China

Such differences of opinion won’t make negotiations with China run any smooth.

As Maggie Gage, head of Washington Research at Credit Suisse, put it on Bloomberg TV:

One of the key hurdles that will determine success versus non-success at these talks is whether the US team can all stay on message together.

A Chinese flag in Shanghai.

Today’s trade talks come a month after the US and China both ratcheted up the tensions, by imposing tariffs on $50bn of each other’s goods.

The White House announced a list of 1,333 Chinese imports to be subject to punitive tariffs of 25%; China retaliated with a list of 100+ American products, including soya beans, cars and aircraft.

So what is America looking to achieve at today’s talks?

On the trade gap, the Trump administration want China to reduce its trade surplus with the US by around $100bn (it’s $375bn today). Unless US consumers start consuming less, that means opening up more Chinese markets to American imports.

On intellectual property, the US Trade Representative’s Office claims that American firms are forced to hand over key technology secrets in return for access to Chinese markets — something Beijing denies.

There’s also the currency issue – Donald Trump’s bugbear that Beijing has been unfairly weakening the yuan to help Chinese firm sell goods abroad. So far, America has resisted labelling China a ‘currency manipulator’ (something which would trigger fresh measures). But it’s on the table, if negotiations get nowhere….

The EC has predicted that Britain and Italy will share the wooden spoon in the 2018 growth race, while Ireland will power ahead:

Bonus mark to anyone who spots the mistake with the Irish flag…..

Rather awkwardly for our purposes, there appears to be a news blackout on the US-China trade talks!

Bloomberg says:

China’s largest news outlets have been ordered to refrain from reporting any material beyond official press releases related to trade talks in Beijing with the U.S., according to people familiar with the matter.

The Communist Party’s propaganda department has told news websites to strictly use statements released by the official Xinhua News Agency, without any extra interpretation, according to the people, who asked not to be named as they’re not authorized to speak on the matter.

Chinese foreign ministry spokeswomen Hua Chunying says Beijing hopes to make progress with America – but only if there is mutual respect.

Hua told reporters that:

“The outcome should be mutually beneficial and win-win.”

The official Xinhua news agency, usually a good gauge of the Chinese government’s views, has also taken a firm line by warning that China could cope with a trade war.

In an editorial, it says:

“China will inevitably suffer losses, but China has the political advantage of a centralised and unified leadership and support of a massive domestic market.”

A former trade advisor to president Obama has warned that Trump’s delegation probably won’t come back from Beijing with a big deal.

Michael Camunez, CEO of consultancy Monarch Global Strategies, says (via CNN):

“I don’t expect any grand bargains being struck….There is no clear strategy that can be discerned.”

EC: We must avoid a trade war

The European Commission has fired a warning towards the US government not to plunge the world into a trade war.

In its latest economic assessment, just released, the EC warns that there are “increased risks on the horizon”.

It singles out the threat of trade protectionism, calling it an “unambiguously negative risk” to the global economic outlook

Pierre Moscovici, commissioner for Economic and Financial Affairs, warns that a trade war could derail Europe’s recovery:

Europe continues to enjoy robust growth, which has helped drive unemployment to a ten-year low. Investment is rising and public finances are improving, with the deficit in the euro area set to drop to just 0.7% of GDP this year.

The biggest risk to this rosy outlook is protectionism, which must not become the new normal: that would only hurt those of our citizens we most need to protect.”

Newsflash: inflation across the eurozone has fallen unexpectedly.

The consumer prices index rose by just 1.2% in the year to April, down from 1.3% a month earlier.

Core inflation, which strips out volatile items, slid to just 0.7% from 1%.

It’s welcome news for households, but a real headache for the European Central Bank as it ponders whether to extend its bond-buying stimulus programme beyond September.

Back in the UK, we have fresh evidence that the economy has lost momentum.

Data firm Markit’s monthly measure of service sector activity has risen, to 52.8 in April from March’s 51.7. Although that shows faster growth, it’s still one of the weakest readings in the last two years.

It appears that sales, investment and hiring have all been hit by economic uncertainty (Brexit and trade war fears could both be blamed).

Markets nervous as trade talks begin

Global stock markets are subdued as investors watch for developments in Beijing.

The main European indices are almost all in the red, after a cautious session in Asia which saw Hong Kong’s Hang Seng shed 1.3%.

European stock markets this morning
European stock markets this morning Photograph: Thomson Reuters

Traders are concerned that a breakdown in negotiations between the US and China could further inflame the situation, potentially leading to further retaliatory action.

Jameel Ahmad, global head of currency strategy & Market Research at FXTM, explains:

The trade talks carry the potential to negatively impact global stocks as a result of reduced risk appetite, and could also result in reduced purchasing momentum for emerging market currencies.

Soybeans being sorted on a gravity sorter machine in Fargo, North Dakota
Soybeans being sorted on a gravity sorter machine in Fargo, North Dakota Photograph: Dan Koeck/Reuters

China appears to have raised the stakes ahead of these trade talks, by stopping buying US soybeans.

That news could send a shiver through America’s agriculture industry, as it has been the biggest supplier of soybeans to the Chinese market.

Bloomberg has the details:

The world’s biggest oilseed processor just confirmed one of the soybean market’s biggest fears: China has essentially stopped buying U.S. supplies amid the brewing trade war.

“Whatever they’re buying is non-U.S.,” Bunge Ltd. Chief Executive Officer Soren Schroder said in a telephone interview Wednesday. “They’re buying beans in Canada, in Brazil, mostly Brazil, but very deliberately not buying anything from the U.S.”

In a move that caught many in U.S. agriculture by surprise, China last month announced planned tariffs on American shipments of soybeans. As the market waited for the measure to take effect, there was some hope among traders and shippers alike that relations between the nations could ease in the meantime and the trade flow would continue. But that doesn’t seem to be the case, at least for now, according to Bunge.

China is “braced for surprises” at today’s trade talks, says the Financial Times, especially as Donald Trump has sent seven top officials along.

The FT has also picked up on Beijing’s refusal to be forced into concessions:

For senior Chinese officials and their policy advisers, the arrival of what they see as a large and unwieldy US delegation is just the latest twist in three months’ of diplomatic exchanges that they have found to be both confusing and insulting. They are also bracing themselves for surprises from Mr Trump, who has previously issued threatening tweets and statements in the midst of delicate Sino-US negotiations.

Last month, after the world’s two largest economies threatened to impose punitive tariffs on $50bn worth of each other’s exports, Mr Trump said he would consider targeting an additional $100bn worth of Chinese exports to the US. The Chinese then closed ranks, saying they would not negotiate in the face of such threats.

“China’s bottom line is that the US will not get anything through blackmail,” said Lü Xiang, an American affairs expert at the Chinese Academy of Social Sciences. “China is waiting to see what [requests] the US will put on the table. But if they pull out a gun and point it at us, then they can finish their tea and leave.”

America is likely to air a series of complaints over China’s trade practices today, including allegations of intellectual property theft and unfair state subsidies

Reuters explains:

A breakthrough deal to fundamentally change China’s economic policies is viewed as highly unlikely during the two-day visit, though a package of short-term Chinese measures could delay a U.S. decision to impose tariffs on around $50 billion worth of Chinese exports.

The discussions, led by U.S. Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He, are expected to cover a wide range of U.S. complaints about China’s trade practices, from allegations of forced technology transfers to state subsidies for technology development.

Treasury secretary Stephen Mnuchin was in a cheerful mood, telling Reuters he was “Thrilled to be here. Thank you,” as he arrived at his hotel in Beijing.

Updated

And we’re off….

U.S. Treasury Secretary Steven Mnuchin and team today
U.S. Treasury Secretary Steven Mnuchin and team today Photograph: Jason Lee/Reuters

Financial markets around the globe will be watching the trade talks in Beijing closely, says Lee Wild, head of equity strategy at interactive investor:

It’s trade rather than interest rates or valuations that are troubling markets right now. US officials have flown into Beijing to try and deescalate a trade spat with China, but these talks won’t be easy.

This is the issue that markets are super sensitive about currently, and which was responsible in part for the first-quarter crash, so it’s unsurprising to see investors take some money off the table.”

The agenda: US-China trade talks; UK service sector PMI

US Trade Representative Robert Lighthizer walks through a hotel lobby in Beijing today.
US Trade Representative Robert Lighthizer walks through a hotel lobby in Beijing today. Photograph: Greg Baker/AFP/Getty Images

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

After months of threats and tit-for-tat tariffs, America and China are actually going to sit down and talk about trade.

A delegation of top US officials has landed in Beijing today for two days of negotiations. The group includes Treasury secretary Steven Mnuchin, economic advisor Larry Kudlow and US Trade Representative Robert Lighthizer.

They’ll face off against senior Chinese officials, led by vice-premier Liu He.

The hope is that the two sides can calm the recent tensions that have already seen steep tariffs slapped on each other’s exports, in what could prove to be the opening shots in a damaging trade war.

President Donald Trump has already raised the stakes, by tweeting that America is pushing for a ‘level playing field’.

However, a breakthrough is far from guaranteed, with China already hinting that it won’t be bullied by America.

Our correspondent in Beijing, Lily Kuo, explains:

The China Daily said China will “stand up to the US” if necessary while Global Times says it hopes the two sides can begin resolving trade disputes.

So, it could be a lively couple of days.

Also coming up today:

On the economics front, a new healthcheck on Britain’s service sector may show that activity accelerated in April after a weak March. A weak reading, though, would put the final nail in the coffin of an interest rate rise next week.

New inflation data from the eurozone will feed into the debate on whether the European Central Bank should rein in its stimulus programme.

Plus, there’s new jobs, trade and service sector data from America.

The agenda:

  • 9.30am BST: UK service sector PMI report for April
  • 10am BST: Eurozone CPI inflation figures for April
  • 1.30pm BST: US trade gap figures for March
  • 1.30pm BST: US weekly jobless claims figures
  • 3pm: US service sector PMI, and factory orders

 

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