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Fed rate raise and looming China tariffs hit Wall Street

While the Fed rate rise was expected, the markets can't be sure whether Trump will add new tariffs to Chinese goods.

Nathan Smith
Thu, 14 Jun 2018

US stocks lost some ground on Wednesday after the Federal Reserve raised interest rates and projected a slightly faster pace of rate hikes in the coming months.

The Federal Reserve’s move was widely expected but still marked a turning point in the US central bank’s shift from policies introduced to combat the 2007-2009 global financial crisis.

In raising its benchmark overnight lending rate a quarter of a percentage point to a range of between 1.75% and 2%, the Fed decided against keeping rates low to stimulate the economy and signalled it would accept above-target inflation at least through 2020. The Fed has raised rates seven times since late 2015. Two additional hikes are now expected by the end of this year, compared to one previously.

At market close, the Dow Jones Industrial Average fell 119.53 points, or 0.47%, to 25,201.20, the S&P 500 lost 6.84 points, or 0.25%, to 2,779.99 and the Nasdaq Composite dropped 8.09 points, or 0.11%, to 7,695.70.

Euro-area industrial production fell more than expected in April, dropping 0.9%, with poor economic data becoming the norm in the eurozone ahead of tomorrow’s European Central Bank decision. The meeting, after which the ECB might announce an end date for money printing, will also be accompanied by its latest projections for the region’s economy.

Overnight, the MSCI Asia Pacific Index fell 0.4% while Japan’s Topix index closed 0.4% higher as the yen weakened ahead of the US Fed decision. In Europe, the Stoxx 600 Index was 0.2% higher.

US to decide on China tariffs
Markets are watching closely for US President Donald Trump to decide on imposing tariffs on Chinese goods as soon as Friday or next week, a move which can expect a quick retaliation from China.

Trade talks between China and the US took a friendly turn in the weeks leading up to the recent North Korea summit as Mr Trump sought Beijing's help. After the summit, Trump reinforced his friendship with China’s leader and says Beijing did not do an adequate job in closing its border to trade with North Korea in recent months.

"Which is a shame. But I have to do it. I have no choice. For our country I have to do it," Mr Trump told a press conference after the North Korea summit in Singapore, possibly referring to tariffs.

The Trump administration is expected to meet its Friday deadline for publishing a final list of Chinese goods that will be hit by the 25% tariff, but it is unclear when the tariffs will actually be imposed. White House trade adviser Peter Navarro said on Tuesday the administration would introduce tariffs shortly on only a "subset" of goods included on the original list, which included about 1300 products that totalled roughly $US50 billion.

The original list of Chinese goods includes all kinds of everyday products ranging from birth control pills and lawnmowers to ink cartridges and beer kegs. The new tariffs could hit a proposed list as part of the administration's effort to stop the loss of valuable US intellectual property to China through forced technology transfers and theft. 

While the initial tariff list will be slightly pared down, the administration is also considering a separate list of additional items – largely looking at Beijing's Made in China 2025 plan – that would be subject to more public input and on which tariffs could be imposed at a later date.

Over the past few months, various parties have attempted to influence the final policy – the USTR received more than 3000 comments on the action. And close to 80 witnesses at the hearings either asked for specific items to be removed from the list or urged the administration not to impose the duties at all. 

Pompeo wants speedy action in DPRK
US secretary of state Mike Pompeo says the US hopes to achieve “major disarmament” of North Korea’s nuclear arsenal during the Trump administration’s first term in office and would resume joint military exercises with South Korea if the talks stall.

“We’re hopeful that we can achieve that in the two and a half years,” he told reporters in the first on-the-record interview since the Singapore summit on Tuesday.

The agreement by North Korea to work toward “complete denuclearisation” of the peninsula, he asserted, was equivalent to a commitment by Pyongyang to accept that the elimination of its nuclear weapons and forces must be irreversible and verifiable, although neither of those words is in the joint statement.

“Let me assure you that ‘complete’ encompasses verifiable in the minds of everyone concerned. One can’t completely denuclearise without validating, authenticating – you pick the word,” he says.

For his part, Mr Trump wrote on Twitter: “Everybody can now feel much safer than the day I took office. There is no longer a nuclear threat from North Korea.”

Mr Pompeo didn’t say whether the administration had asked its military commanders in South Korean before deciding to suspend the exercises. But he emphasised that the US president had told the North Korea leader Kim Jong Un that the exercises would be resumed if he didn’t engage seriously in nuclear talks.

“At the point that it’s concluded they are not, the president’s commitment to not have those joint exercises take place will no longer be in effect,” Mr Pompeo says, adding that the two sides hadn’t yet decided when talks would continue or what form they would take but he suggested it would happen soon.

Bitcoin continues drop
Bitcoin extended its losses to a fourth session, dipping by as much as 20%, as questions mount about whether the world’s biggest cryptocurrency was manipulated during last year’s record price surge.

After rallying more than 1400% in 2017, Bitcoin is down almost 70% to about $US6,245, from its record high of $US19,511 in December.

The digital coin has closed below its 50-, 100- and 200-day moving averages for the past 16 days, the longest stretch below those support levels this year.

Many of Bitcoin’s peers have also fallen. Ethereum, the No 2 coin by market value, and No 3 Ripple have both dropped about 20% this week.

On Sunday, Coinrail, a small cryptocurrency exchange in South Korea, notified that its system was hit by a “cyber intrusion,” causing a loss of about 30% of the coins traded on the exchange. It did not quantify its value but estimates suggest about 40 billion won ($52.51 million) worth of virtual coins were stolen.

The latest hacking wiped out more than $56 billion in the market value of the cryptocurrency market on Sunday. Bitcoin itself declined by nearly $US1000.

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Nathan Smith
Thu, 14 Jun 2018
© All content copyright NBR. Do not reproduce in any form without permission, even if you have a paid subscription.
Fed rate raise and looming China tariffs hit Wall Street