This is what a trade war looks like as upcoming interest rate pain bakes in.

In the chart above, I’ve chosen to compare the CSI300 and the S&P500 share price indexes, as proxies for the the Chinese and US economies.

In the chart above, I’ve chosen to compare the CSI300 and the S&P500 share price indexes, as proxies for the the Chinese and US economies.

Here’s a short follow up on my earlier blog on this topic, a month ago.

Since the US steel and aluminium tariffs came into force in mid July, the US and Chinese markets have been on a tear (away from each other).

Whilst there is still a big spread between the two curves, over the past few days the US market (red curve) has shown a significantly steeper decline.

Reasons include:

  • the September rate hike in the US which propelled the short term Fed Funds rate to a range of 2.0-2.25% with expectation for another rise in December;

  • the US Fed’s apparent commitment to continue with 0.25% rate rises, almost in lock-step - much to Donald Trump’s dislike (amusing as that might be);

  • rising long yields in the US with the 10 year needle recently moving to 3.16% and the 30 year now at 3.34%;

  • the consequential potential for large lumps of capital to flow out of emerging markets;

  • heavy Central bank balance sheets with only the US Fed running theirs down;

  • scary Government deficits around the world with the median general government debt-GDP ratio sitting at 52%, up from 36% before the GFC;

  • the additional baking in of a likely deep and protracted trade war, aka 1930s style (and uncertainty surrounding whether Donald Trump will dismantle tariffs if he feels he can achieve more by way of trade agreements);

  • a number of weeks of punishment in relation to Chinese tech stocks that are quoted on NASDAQ and NYSE in the US, i.e., Alibaba, Ten Cent,, Baidu, etc., as a side-car to the “America First” and trade war strategy adopted;

  • relatively high oil prices weighing on industry (with industrial growth wobbles also reflected in Copper which is well off its early year high and spot 62% CFR China Iron Ore which was down 1.41%); and

  • recent China bank bail-outs, which may provide a quick sugar-high for local borrowers, but it’s also a signal of a slowing and heavily indebted economy (add to that a lack of transparency in its 2 year old credit default swap market and a full dam of shadow banking liabilities).

Last night in the US, tech and industrial shares were battered. The tech heavy NASDAQ was down 4.44% and I’ve noticed that many stocks have continued to decline in pre-market trading.

Trading on ASX was moderately ugly with the market down 2.75% today.

But, China’s CSI300 was down 4.8% with Shanghai down 5.22% and Hong Kong down 3.5% today.

In contrast, gold is up marginally (and bitcoin is down nearly 5%) and the larger and more credible ASX listed gold miners showed good gains today.

So, there’s a bit of a golden lining for WA’s gold miners, assuming the AUD doesn’t climb at a higher rate.

But banks, healthcare, developers, contractors and even battery minerals, etc., have all been belted, indicating a significant increase in across the board volatility.

Talking about volatility, the US fear index (i.e., CBOEs VIX) rose by 48% last night to a level of 23.6, albeit from a very low base.

To put that into context, 10 years ago in October 2008 a few weeks after the Lehman collapse, it hit a high of ~89, and we’re certainly not there.

That said, it’s still a big increase.

I feel it’s probably a long coming reaction to a non-Trump compliant hawkish Fed that’s seeking to normalise in the face of US protectionism that’s threatening to unhitch the US from the rest of the world (not just China).

Or, maybe it’s because it’s October.

Stay tuned.


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