Fear will return (Daily analysis 06.07.2018)

Both the US and China impose the first round of customs duties on imported products. The Fed did not focus much on the risk of a trade war. There is a chance for the highest wage growth in the US in less than a decade. In the case of the euro, the zloty stabilises slightly above the 4.35 level, but threats are still present.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 2:30 p.m.: US Department of Labor report for June (estimates: change in employment 195k; unemployment rate 3.8% - no change; change in wages 2.8% year-on-year and 0.3% month-on-month).

US and China impose tariffs

In line with expectations, the US imposed 25% customs duties on imports from China. They regard goods imported from the Middle Kingdom worth (on an annual basis) of 34 billion USD. Probably this amount will increase by a further 16 billion USD in the near future (July or August). President Trump's statements also suggest that, ultimately, all Chinese imports into the US (which amount to around 500 billion USD per year), could be subject to customs duties.

Beijing has also, as announced, imposed additional customs duties on US goods. The US media even followed a soybean ship sailing to a Chinese port in the north of the country (Dalian). However, it did not manage to call at the port before the implementation of trade restrictions, therefore the imported soybean will be subject to new, higher rates of duty.

In the media appeared a lot of statements of Chinese officers or people close to the media power. The Ministry of Commerce stated that the United States had started 'the biggest trade war ever'. According to Xinhua, the official news agency, as reported by the Wall Street Journal, says the US will be "forced to wake up" after it pays a "huge price" due to foreign trade disturbances. At this point, of course, a question arises. Why do markets hardly react at all?

First of all, it appears that the first part of the duty was already included in the exchange rates. In recent weeks, many emerging country currencies have been clearly depreciating (including the Chinese yuan). Secondly, the market still believes that although the current disputes are going deeper than in recent decades, at some point there will be a warming up of the situation. Therefore, this is a reason why the sale of more risky assets has been limited in recent days, and in the case of a smaller supply, the demand that has appeared here and there has slightly increased valuations.

Of course, the strategy 'nothing has happened' and 'everything will return to normal' will become invalid as both sides continue to become more radical. The perspective of imposing duties on the next round of commodities (100 billion USD or 200 billion USD) would probably result in an escape from the currency of emerging markets, new lows on the yuan, as well as pressure on the zloty. This would be particularly evident if the US tightened its position towards the European Union and NAFTA countries. Although it seems logical that Washington does not want to remain alone, and would rather like Beijing to be unable to find allies, a similar thinking has proved wrong in recent weeks.

It is also worth noting another element. This kind of market behaviour can be refreshing for the parties involved in the customs conflict. If investors are calm, there will be no reason to improve the situation. Therefore, the rhetoric on both sides may be tightened before we see a further series of "black days" on currencies or shares. As a result, the base scenario remains the return of fear and new lows on both the yuan and many EM currencies, as they are the ones that may force a more constructive stance on Washington or Beijing.

Fed, labour market and the zloty

Fed's minutes published yesterday were not exceptionally dovish at all. There were few mentions of trade-related risks (among central bank economists practically no, and among FOMC members very limited). On the other hand, much good could be read about the strength of the American economy, investments (especially in the mining sector), the labour market or approaching the inflation target. Therefore, it is not clear that the Fed will quickly abandon the monetary tightening, which should support the US dollar.

Today, one of the most important data of the month will be published - the US Department of Labor report. Economists expect wages in the US to rise by 2.8% year-on-year in June. However, if this level were to be exceeded by only 0.1 percentage points, the highest reading in less than a decade would be given. With ISM indexes that are more or less dovish than expected, FOMC can support the dollar.

In the case of the zloty, the Polish currency is still under pressure. Paring some losses in recent days does not change much in this context. As the external trade situation is likely to deteriorate even further before it improves and the Fed has no reason to stop interest rate rises, the base scenario still is to exceed the recent highs on both the dollar and the euro.