In almost every way, the overnight trading action has been a mirror image of the ramp observed on Monday morning, when trade tensions - inexplicably, one trading day after trade war started - were said to have "gone away" leading to a furious global rally.

Not so much today, when hours after Trump unveiled the second round of trade war - at the worst possible time according to bulls, just ahead of earnings season, once again spoiling the positive effect of what is set to be another 20%+ EPS rise for the S&P - by pushing ahead with plans to impose tariffs of 10% on an additional $200 billion of Chinese goods by releasing a list of targeted products that includes consumer items such as clothing, television components, and refrigerators, global stocks are a sea of red amid a worldwide market selloff as traders realized that not only is trade war not hibernating, but it is set to keep getting worse as Steven Englander explained last night, as escalation has now crossed past "the point of no return."

While the duties have some time before taking effect, and the soonest they could be implemented would be after public consultations end on Aug. 30, Beijing has described the move as “totally unacceptable” bullying and vowed it will be forced to retaliate, without however giving details. 

However, the biggest risk is that, as Bloomberg wrote, Trump has pushing his China trade conflict beyond "a point of no return", where neither side can back down. China now has seven weeks to make a deal or dig in and try to outlast the U.S. leader. However, president Xi Jinping, facing his own political pressures to look tough, has vowed to respond blow-for-blow. He’s already imposed retaliatory duties targeting Trump’s base including Iowa soybeans and Kentucky bourbon.

Yet matching the latest U.S. barrage would force China to either levy much higher tariffs or take more disruptive steps like canceling purchase orders, encouraging consumer boycotts and putting up regulatory hurdles. Not only does that risk provoking Trump to follow through on threats to tax virtually all Chinese products, it could unleash nationalist sentiment on both sides that fuels a deeper struggle for geopolitical dominance.

“It’s already past the point of no return,” said Pauline Loong, managing director at research firm Asia-Analytica in Hong Kong. “What’s next is not so much a trade war or even a cold war as the dawn of an ice age in relations between China and the United States.”

As noted above, the Chinese Commerce Ministry said on Wednesday that it would be forced to retaliate against what it called “totally unacceptable” U.S. tariffs, with China’s Vice Minister of Commerce Wang Shouwen saying in comments to Bloomberg that Beijing “never yields to threat or blackmail” and will retaliate against the “groundless” tariffs."

"The U.S. side ignored the progress, adopted unilateral and protectionist measures, and started the trade war.”

In the aftermath of the latest development, OCBC analysts told clients to “expect a risk-off tone to prevail over Asian markets today as investors prepare for the next escalation of U.S.-Sino trade tensions and China’s response."

They were right, and sure enough, the two key markets that everyone looks at first in the morning, US equity futures, which are down over 20 points and set for the biggest drop in 2 weeks, wiping out the gains from the past two days...

... and the Shanghai Composite, which closed -1.8% lower after sliding, even more, earlier in the session...

... have been hammered, dragging down the rest of global assets. Here one reason why Trump may be willing to keep pressing China is that a pattern observed so far in the escalating battle between the world’s top two economies is that the tensions hit Chinese shares harder than American ones - they are now in a bear market, while the S&P 500 is within about 3 percent of a record high.

In Europe, the Stoxx Europe 600 Index ended its best run since March, led lower by tariff-related sectors such as miners and autos and the MSCI Asia Pacific Index fell. Stoxx 600 basic resources index SXPP dropped as much as 3.4%, most in 2-1/2 weeks, with technical charts showing index testing key support levels amid new escalation in global trade war. After rising back over the 200DMA, Stoxx 600 is back under this key moving average.

Commenting on the latest escalation, Nomura FX strategist Dushyant Padmanabhan said that "this escalation, and the timing of it, seems to have caught the market a bit by surprise," adding that "the $34 billion and $16 billion tariffs were well flagged and, as such, had little impact on markets,” but while this $200 billion has been mentioned before there’s no clear sense of timing around it.

Meanwhile, China's currency - that other global risk on/off catalyst - tumbled, with the offshore yuan falling as much as 0.74%, the most in a week, and dropping 1000 pips in 2 days...

... while the onshore yuan slid 0.46% to 6.6710 and was headed for the weakest close in 11 months, since August 2017. The Yuan may fall closer toward a multi-year low of just below 7 per dollar, with 6.7 the next key level to watch, Nomura strategists wrote in a note on Wednesday.

At the same time, the dollar rallied strongly against G-10 and all other currencies too as the latest escalation in the U.S.-China trade war caught the market off guard, increasingly shorted the greenback and long-risk.

Elsewhere in FX, the euro predictably weakened the most in more than a week to re-test the 1.17 level, while the pound dropped ahead of the publication of the Brexit white paper Thursday. That said, there was one silver lining in overnight trading: volatility in G-4 currencies saw a rather muted response with traders in no rush to add exposure as the new list of tariffs won’t be implemented till end-August. The loonie fell toward a one-week low before the Bank of Canada’s rate decision and amid lower oil prices. Meanwhile, the Australia and New Zealand dollars led losses among G-10 currencies on renewed trade war.

"In the short run it’s very difficult to see what’s going to bring an end to this escalation of tit-for-tat," Richard Turnill, chief investment strategist for BlackRock told Bloomberg TV. “It’s those increasing concerns that are going to weigh on market returns and force investors increasingly to look for more resilience in their portfolios.”

In rates, US Treasuries were trading close to overnight highs, with the curve unchanged. The yield on the 10Y dropped 4 bps to 2.83%: the lower yields slide, the greater the threat a sharp short squeeze takes them even lower as a result of another record shorts in the US rates complex.

In commodities, oil dropped below $74 a barrel in New York, even as the latest API report showed shrinking U.S. crude stockpiles. Brent is falling faster than WTI as a result of Libya's NOC resuming control of Eastern oil ports, with operations set to resume to normal levels “in a few hours." This is undoing the support offered on Tuesday by a larger than expected draw in API crude inventories. The metals sector is also seeing broad-based losses, with Gold down 0.2%, copper falling over 3% during Asia-Pac trade to its lowest in around a year, Shanghai zinc fell limit down shortly after the Chinese open and lead is languishing around near 1-year lows. Platinum is also in negative territory with the market set for its 4th consecutive surplus this year, on the back of falling demand in the auto sector, as according to the CPM Group.

What to watch today: NATO summit in Brussels; U.S. sells 10-year notes; producer prices, wholesale inventories; BOC rate decision, press conference to follow; New York Fed President John Williams, ECB’s Mersch and Nouy speak.

Market Snapshot

• S&P 500 futures down 0.8% to 2,775.50
• STOXX Europe 600 down 1.1% to 381.85
• MXAP down 0.9% to 164.27
• MXAPJ down 1% to 534.79
• Nikkei down 1.2% to 21,932.21
• Topix down 0.8% to 1,701.88
• Hang Seng Index down 1.3% to 28,311.69
• Shanghai Composite down 1.8% to 2,777.77
• Sensex up 0.2% to 36,316.39
• Australia S&P/ASX 200 down 0.7% to 6,215.60
• Kospi down 0.6% to 2,280.62
• Brent futures down 2.1% to $77.19/bbl
• Gold spot down 0.4% to $1,250.05
• U.S. Dollar Index up 0.3% to 94.42
• German 10Y yield rose 4.4 bps to 0.364%
• Euro down 0.2% to $1.1726
• Italian 10Y yield rose 0.5 bps to 2.405%
• Spanish 10Y yield fell 0.3 bps to 1.275%

Top Overnight News from Bloomberg

• U.S. releases $200bn list of Chinese goods for additional possible tariffs, would take effect Aug. 30
• China confirms it will take countermeasures, describes latest U.S. move as totally unacceptable and urges other countries to join China to protect free trade
• Brexit: Euroskeptic Tories that failed to stop PM May’s soft Brexit plan are considering a radical last-ditch move that could bring down her minority government later this year, according to people familiar
• Libya: force majeure lifted at eastern oil ports, exports to return to normal levels
• President Donald Trump opened up another front in his tussle with allies on his arrival at NATO’s annual summit, targeting Germany over its support for the Nord Stream 2 gas pipeline from Russia
• Euroskeptic Tories have failed to stop U.K. Prime Minister Theresa May’s plan for a soft Brexit and are considering a radical last ditch move that could bring down her minority government later this year
• Deutsche Bank AG is deploying top executives, as well as billions of dollars, as it seeks to win more business with Wall Street’s most active dealmakers
• Malaysia’s central bank left its benchmark interest rate unchanged in the first policy meeting under a new governor, providing support to an economy that Prime Minister Mahathir Mohamad is trying to revamp

Asian stocks slumped across the board with sentiment spooked on increased trade concerns after the US announced a new tariff list on an additional USD 200bln worth of Chinese goods. The renewed US trade offensive picks up from Trump’s threats made last month and in turn weighed heavily on US equity futures as well as Asia-Pac bourses, while some commodities in Shanghai went into free fall alongside the broad risk-averse tone. ASX 200 (-0.7%) and Nikkei 225 (-1.2%) were lower with commodity-related sectors in Australia suffering after declines in the complex in which Shanghai Zinc fell 6% to hit limit down and copper fell to its lowest in about a year, while losses in Tokyo were exacerbated by safe-haven flows into the JPY. Elsewhere, Hang Seng (-1.3%) and Shanghai Comp. (-1.8%) took the brunt of the increased trade tensions, although both were off the day’s lows after an initial composed response from China which stated it was vital to send a positive signal of cooperation and suggested that if the US will go low, it will go high. Finally, T-note futures traded higher overnight with prices spurred by the tariff list announcement, while 10yr JGBs were flat after they failed to benefit from the broad risk-averse tone, as well as the BoJ’s presence in the market for JPY 960bln in 1yr-10yr maturities.

Top Asian News

• China Selloff Regains Momentum as Tariff List Hits Stocks, Yuan
• Turkey Faces Ticking Bomb With Energy Loans of $51 Billion

European equities (Euro Stoxx 50 -1.1%) are following in step with Asian stocks and falling sharply on the back of trade concerns as the US began the process of imposing new 10% tariffs on a further USD 200bln of Chinese imports. This new list was said to include several metals and as such material names are underperforming alongside energy names (on softer oil prices), but losses are broad-based and being seen across all sectors. 21st Century Fox have increased their bid for Sky (-0.6%) to GBP 14.00/share, an independent committee from Sky has  said they have reached an agreement on this increased recommended pre-conditional cash offer

Top European News

• Hedge Fund Said to Sell Playtech Stake Before Profit Warning
• Indivior Plunges as U.S. Generic Setback Hurts Drug Orders
• European Stocks Extend Early Losses as Miners, Autos Hammered
• Danske Fine May Be $670 Million as Analysts Look at New Evidence

In FX, AUD Extending recent losses vs its US counterpart and underperformance within the G10 bloc, with a further retreat from near 0.7500 peaks to breach support just ahead of the big figure below (0.7401 was the 10 DMA and support from there not seen until the 61.8% fib around 0.7377). The Aud continues to track US-China import tariff developments as a barometer for wider global trade contagion and repercussions given closest links and relations with China, while its NZD antipodean peer is less sensitive and has held up better as a result – cross back below 1.0900 but Kiwi losing 0.6800 vs the Usd. CNH/CNY - Taking a direct hit from threats to raise the bar on imports to $250 bn in total by Beijing in response to a further $200 bn Chinese goods and services listed by the White House, but also weaker via the latest PBoC Cny fix amidst ongoing speculation that depreciation could be deployed as another trade war weapon. Usd/Cny closed around 6.6667, with resistance for Usd/Cnh just above 6.7000 subsequently tested. EM/SCANDI : Weaker across the board on general risk-off position and more independent bearish factors as the Lira lurches again on more fall-out from President Erdogan’s cabinet appointments and Usd/Try rallies to circa 4.7600+ again. 

In commodities, oil is currently being hit by the risk-off mood, with both Brent and WTI in the red. Brent is falling faster than WTI as a result of Libya's NOC resuming control of Eastern oil ports, with operations set to resume to normal levels “in a few hours” as of 08:45 BST. This is undoing the support offered on Tuesday by a larger than expected draw in API crude inventories. The metals sector is also seeing broad-based losses, with Gold down 0.2%, copper fell over 3% during Asia-Pac trade to its lowest in around a year, Shanghai zinc fell limit down shortly after the Chinese open and lead is languishing around near 1-year lows. Platinum is also in negative territory with the market set for its 4th consecutive surplus this year, on the back of falling demand in the auto sector, as according to the CPM Group.

Looking at the day ahead, in the US the most significant release is the June PPI report (core PPI of 2.6% yoy expected), while May wholesale trades sales and final May wholesale inventories are also due. Away from the data, BoE Governor Mark Carney will speak late in the afternoon on the global financial crisis at a conference in Boston while New York Fed President John Williams will speak to business and community leaders at an event in Brooklyn. Meanwhile, the NATO meeting begins, continuing into Thursday, while Japan PM Abe meets European Council President Tusk and EC President Juncker. Meanwhile, the ECB’s Draghi, Praet, Mersch and Nouy will speak at Frankfurt. England will meet Croatia for a place in the World Cup final.

US Event Calendar

• 7am: MBA Mortgage Applications, prior -0.5%
• 8:30am: PPI Final Demand MoM, est. 0.2%, prior 0.5%; PPI Ex Food and Energy MoM, est. 0.2%, prior 0.3%
  • PPI Ex Food and Energy YoY, est. 2.6%, prior 2.4%; PPI Ex Food, Energy, Trade YoY, prior 2.6%
• 10am: Wholesale Trade Sales MoM, est. 0.5%, prior 0.8%; Wholesale Inventories MoM, est. 0.5%, prior 0.5%

DB's Jim Reid concludes the overnight wrap

It’s a sign of how good England have been at this World Cup that even without playing last night they made it through to the last 3. Happy days. Congratulations to readers in France and commiserations to those in Belgium this morning. Whoever gets through tonight will have a tough game against a very skillful French team. Ahead of the biggest game in this country for 28 years tonight I’m a little fragile this morning. Last night I finished packing away the last of nearly 2000 CDs I’ve had in my garages since streaming came along and made them largely redundant. They are to be collected by a charity shop today although given some of my peculiar album purchases over the years some of them might remain on the shelf longer than England’s football team have been away from a World Cup final. In skimming through them as I packed, it really did feel like I was saying goodbye to the soundtrack to my adolescence and young adult life. I hope I’ve done the right thing. If you think I’m going to regret this please let me know ASAP before they get picked up today and are gone forever. This moving house thing is very stressful and we haven’t even moved yet.

As a contrast, this week has been noticeable for the lack of stress mostly due to no further escalation of the trade dispute. However, things have taken a different turn after the US markets closed overnight. The US Trade Representative office has released a list of an additional $200bn worth of Chinese imports to be hit with higher tariffs of 10%, although a final decision on the tariffs is not expected until after the public consultations period which ends on 30th August. The affected product list includes consumer goods such as clothing, refrigerators but excludes items such as mobile phones. In terms of initial reactions, China’s Commerce Ministry noted it is “shocked” by the US actions which “were hurting China… the entire world and the US itself” and that it will have no choice but to respond to the US move. Back in the US, the Senate Finance Chair Hatch called the proposal “reckless”.

This morning in Asia, markets have pared back deeper losses at the open to trade c1.5% lower with the Nikkei (-0.96%), Kospi (-0.53%), Hang Seng (-1.42%) and Shanghai Comp. (-1.87%) all down as we type. Meanwhile, the Chinese Yuan is down c0.4% and futures on the S&P are also down c0.6%. Datawise, Japan’s June PPI edged up 0.1ppt mom to an in-line print of 2.8% yoy.

As a reminder, DB’s Peter Hooper and team have recently published a note looking at the impact of trade frictions on the US macroeconomy. They noted that higher tariffs on $250bn worth of Chinese goods and $350bn worth of automotive products could reduce imports and lift the US GDP by c0.5ppt. However, this gain is likely to be swamped by various negative effects if the tariffs are actually implemented. These include: i) -0.4ppt hit to US GDP from higher prices and lower consumer spending, ii) -0.6ppt on US GDP from retaliatory tariffs from China and the EU, as it depresses exports and iii,) -0.5ppt hit to GDP from the confidence hit to businesses and households, particularly the flow on drags on investments and consumption spending. Refer to their note for details.

As for markets yesterday, risk assets edged up in the absence of further trade tensions (before the peace was shattered overnight) and investors turning their focus to the US results season. The S&P was up for the fourth straight day (+0.35%) as PepsiCo’s share price jumped the most in c9 year (+4.8%) following an above-market result and guidance that Q4 earnings will be "substantially higher”. Elsewhere financials was the only sector in the red after rallying the prior day. In Europe, the Stoxx 600 advanced for the sixth straight day (+0.4%), marking the longest winning streak since March. As a quick stock take, the S&P is now the highest in c5 months and +8.2% higher than its February lows, albeit still down -2.8% from its record high in January. In comparison the Stoxx 600 and Shanghai Comp. are down -4.1% and -20.6% respectively from their January high, although the former has partly recovered to a c1 month high. The overnight news will likely put a dent in these recoveries though.

In government bonds, yields on 10y Treasuries reversed earlier gains of c2bp to close -0.6bp lower at 2.851% following the aforementioned threat of higher tariffs on Chinese goods. We’re another 1bps lower in the Asian session. Back in Europe, core bonds broadly weakened (Bunds +2bp; OATs +1.3bp) while Gilts rose +4.9bp as Brexit uncertainties somewhat stabilized and GDP data pointed to a healthy return in economic growth.

In FX, Sterling reversed losses to be up +0.12% as concerns for a potential leadership challenge to PM May eased and German Chancellor Merkel also seems to be backing PM May’s softer Brexit proposal, calling it a “solid step forward”, although she also added that “we’ll continue to have lively discussions (on the proposals)”. Meanwhile, the US dollar index (+0.09%) and Euro (-0.06%) were both little changed, while Brent oil rose for the second straight day (+1.01%).

Following on with some more specific Brexit headlines. After PM May’s latest proposal for a softer Brexit approach, the EU’s Chief Brexit negotiator seems to be pushing back on the plans, indicating that “we’ll protect this single market, which is based on the indivisibility of…..the four freedoms…of people, goods, services and capital”. Notably, Bloomberg cited sources that noted EU diplomats have not fully started going through the UK plans yet while the Irish PM Varadkar was relatively upbeat as he noted the EU may be “entering into a space” where it can show flexibility in Brexit talks. So lots bubbling along.

Moving onto Italy, the Bank of Italy Governor and the ECB’s Visco noted that Italy’s economic growth has slowed this year and could face follow on risks linked to the US tariffs decisions, but he still expects growth to be above 1%, in part given the supportive financial policy conditions in the EU bloc. He also added that a relaunch of investments and pro-growth policies are as important as cautious management of public finances for the country.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the May JOLTS report reported a 0.1ppt mom rise in the quits rate to 2.4% - the highest since February 2001, which should bode well for expectations of future wage gains. Meanwhile, the June NFIB small business optimism index moderated 0.6pts from last month’s 34 year high to an above market print of 107.2 (vs. 106.9 expected).

In Europe, the macro data were broadly weaker than expectations. In Germany, the July ZEW survey on the current situation was 72.4 (vs. 78.1 expected) while the expectations index fell for the fifth straight month to the lowest level since 2012 (-24.7 vs. -18.9 expected). Meanwhile, the Euro area’s ZEW expectations reading also fell to the lowest since August 2012 (-18.7 vs. -12.6 previous). For May industrial productions, the UK, France and Italy’s readings were all weaker than expectations at 0.8% yoy (vs. 1.9% expected), -0.9% (vs. 0.4% expected) and 2.1% (vs. 2.8% expected) respectively. Back in the UK, the May trade deficit was narrower than expected at -£2.8bn (vs. -£3.4bn expected) with upward revisions to the prior month’s reading. Elsewhere, the inaugural ONS estimate of monthly GDP growth indicated that the economy grew at an in line rate of 0.3% mom in May and based on the first two months of the quarter, Q2 appears on track for growth of about 0.4% qoq (vs. 0.2% previous). Following the above and no escalation in the political risk, the implied Bloomberg odds of an August rate hike rose 7ppt to 74%.

Looking at the day ahead, there are no releases of note in Europe while in the US the most significant release is the June PPI report (core PPI of 2.6% yoy expected), while May wholesale trades sales and final May wholesale inventories are also due. Away from the data, BoE Governor Mark Carney will speak late in the afternoon on the global financial crisis at a conference in Boston while New York Fed President John Williams will speak to business and community leaders at an event in Brooklyn. Meanwhile, the NATO meeting begins, continuing into Thursday, while Japan PM Abe meets European Council President Tusk and EC President Juncker. Meanwhile, the ECB’s Draghi, Praet, Mersch and Nouy will speak at Frankfurt. Oh and England will meet Croatia for a place in the World Cup final!!