Trump's economy booms as China is on verge of bear market

The losers in a potential global trade war are already apparent – and it’s not Wall Street. The US economy is powering ahead as Europe and Asia show signs of weakening.

Confirmation will come this week as the US Commerce Department releases data on durable goods (Thursday, NZ time), gross domestic product (Friday) and personal income and spending (Saturday).

While the outlook for eurozone economic growth remains uncertain after a weak start to the year, inflation is moving in the right direction for the European Central Bank.

After a jump to 1.9% in May from 1.2% in April, figures released by the European Union’s statistics agency are expected to record a further, small increase to 2% in June, or slightly above the central bank’s target.

US stocks recovered on Friday after posting their biggest one-week slide since March.

President Donald’s Trump’s determination to reduce US trade deficits is hurting investors in some industrial firms, agricultural companies and auto makers. Bellwether stock Caterpillar fell 6.7% for the week and Boeing lost 5.3% over five sessions.

The EU has imposed $US3 billion in tariffs on a selective list of US goods aimed to hurt Mr Trump politically, such as Harley Davidson motorcycles, bourbon and jeans,

This brought the response of a proposed 20% tariff on European cars. The EU imposes 10% tariffs on imported cars while the US tariff is 2.5%, though the US imposes a 25% tariff on light trucks versus Europe’s 10%.

Selloff in emerging markets
Meanwhile, investors withdrew the biggest weekly amount from emerging market equities, financials and investment-grade bond funds since 2016, Bank of America Merrill Lynch says.

“We’re starting to see some corporate impact to some of the rhetoric coming out of Washington,” Voya Investment Management head of asset allocation Barbara Reinhard says,

“Potentially targeting the auto sector has a far greater economic impact than anything that has been done so far.”

The Stoxx Europe 600 rose 1.1% on Friday but fell 1.1% for the week, weighed down by shares of European automakers.

In Asia, retaliation to US tariffs by China is having a knock-on effect on other economies that are export-intensive and linked to Chinese supply chains.

China’s Shanghai Composite fell 6% last week, compared with a 1.2% fall for Wall Street’s S&P 500.

While US equities have risen during the past three months as tit-for-tat tariff threats have continued, the MSCI Asia ex-Japan is down by over 5%.

China on verge of bear market
China’s Shanghai Composite Index is down by more than 19% from its January peak, hovering on the edge of bear market territory during intraday trading. A bear market is usually defined as a fall of 20% or more from a recent high.

Mr Trump has threatened a 10% additional $US200b tariff on Chinese goods apart from the initial $US50b that was a penalty for intellectual property violations and technology theft.

If China retaliates again, the US will add another $US200b of Chinese exports and double that again unless the Chinese relent.

On Wall Street, the Dow Jones Industrial Average broke an eight-day losing streak on Friday to rise 119.19 points, or 0.5%, to 24,580.89 but slid 509.59 points, or 2%, for the week.

The S&P 500 added 0.2% to 2754.88 and fell 0.9% for the week while the Nasdaq Composite edged down 0.3% to 7692.82 and lost 0.7%, for the week.

Stocks were boosted by energy shares in the wake of major oil producers to raise output quotas by about 6000,000 barrels a day to keep prices from rising too fast.

Shares in Chevron rose 2% and Exxon Mobil added 2.1%. The move came as a relief to investors, who had been expecting output to rise even further to one million barrels.

Oil prices jump
US crude futures for August delivery jumped 4.6% to $68.58 a barrel – its biggest one-day percentage gain since November 2016 and its highest level since May 24. Brent, the global benchmark, increased 3.4% to $US75.55.

The US Commerce Department’s third estimate for first-quarter gross domestic product (GDP) and consumer spending will show whether they were stronger than previously reported.

The 2.2% growth rate for GDP was revised lower from an initial estimate of 2.3% and a slowdown from the fourth quarter’s 2.9% growth rate. Economists in a Wall Street Journal survey expect the first-quarter GDP reading to remain at 2.2%.

Personal consumption expenditures increased a seasonally adjusted 0.6% in April from the previous month.

The new report will also provide insight into inflation. The US Federal Reserve’s preferred inflation gauge, the price index for personal consumption expenditures, was up 2% from a year earlier in April.

The Journal’s survey forecasts personal income rose 0.4% in May, while consumer spending was also up 0.4%.