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The trade war becomes real, duties “kick in”, USD surges! (Friday, September 13, 2019)

Global stocks faced headwinds on Tuesday, stymied by U.S.-China trade frictions while the British pound flirted with 2 1/2-year lows as

Prime Minister Boris Johnson indicated he could call an election to block lawmakers’ efforts to avert a no-deal Brexit. MSCI’s broadest index of Asia-Pacific shares outside Japan shed 0.3% while Japan’s Nikkei rose by 0.1%.

China’s mainland shares were fractionally lower while Hong Kong’s benchmark edged up 0.1%.

The United States began imposing 15% tariffs on a variety of Chinese goods on Sunday and China began imposing new duties on U.S. crude oil, the latest escalation in their trade war.

Although US President Trump has said both sides would still meet for talks later this month, tensions have shown little sign of abating.

China said on Monday it lodged a complaint against the United States at the WTO over U.S. import duties, trashing the latest tariff actions as violating the consensus reached by leaders of China and the United States in a meeting in Osaka. U.S. manufacturing survey by the Institute for Supply Management

(ISM) due on Tuesday is a major focus for investors. Although US manufacturing activity has been slowing in recent months, the ISM’s index has so far stayed above 50, pointing to growth in the sector. U.S. bond yields rose a tad on profit-taking after a market holiday in the United States on Monday.

The 10-year U.S. Treasuries yield rose 2.5 basis points to 1.532%, off a three-year low of 1.443% touched last week. The yield dropped 51.5 basis points last month, the biggest monthly drop since August 2011. In the currency market, sterling dipped 0.25% to $1.2030 , after having dropped 0.85% on Monday. The currency stood just above its 2 1/2- year low of $1.2015 hit on Aug. 12.

Prime Minister Johnson implicitly warned lawmakers on Monday that he would seek an election on Oct 14 if they tied his hands on Brexit, ruling out ever countenancing a further delay to Britain’s departure from the European Union.

Uncertainties over Brexit have already hit the UK economy, with survey by the IHS Markit/CIPS showing British manufacturing contracted last month at the fastest rate in seven years.

The picture is not much better in Europe, and the European Central Bank is widely expected to cut interest rates further into negative levels next week to cushion the blow, pressuring the euro.

The EUR fell 0.25% to a two-year low of $1.0939 . The two-year German government bond yield has dipped to minus 0.919% on Monday, near its record low around minus 0.964% hit in early 2017. The offshore CNY dropped to a record low of 7.1975 per dollar on Tuesday morning while the Australian dollar lost 0.3% to $0.6700, a stone’s throw from a decade-low of $0.66775 hit last month.

The RBA is expected to keep its policy on hold on Tuesday, though many market players anticipated an interest rate cut next month. Oil prices were also dented by concerns over the trade war. U.S. West Texas Intermediate (WTI) crude lost 0.31% to $54.93 per barrel. International benchmark Brent futures rose 0.15% to $58.75 per barrel.