The Reserve Bank of New Zealand (RBNZ) just cut its official cash rate to 3.5%. This decision coincides with the bank’s growing concerns over US tariffs and their likely impact on economic growth and inflation. In its accompanying Statement of Intent, the RBNZ suggested it was planning for rate cuts further down the line. More importantly, they are willing to respond to outside forces from the current trade wars, particularly between the US and China.
In hindsight, the RBNZ made the right call. Simultaneously, the US escalated its trade war by implementing new tariffs on Chinese imports, increasing jitters throughout global markets. This unexpected trade bout has caused the central bank to reassess its monetary policy course with more prudence. The New Zealand stock market was actually quite strong in the face of adversity. It squeaked by, able to do better than wider regional trends, with a -0.7% drop.
Global Market Reactions
President Donald Trump frequently stressed his hands-on approach in creating “individualized deals” with each country. This method is due to relax the intensifying commercial tensions and ignites hopes for calculated dialogues. The EU and a number of Asian countries indicated a willingness to negotiate terms with Trump, which would change the trade landscape dramatically.
The unintended ripple effect of the tariffs has been a resulting weakening of multiple markets. Italy’s FTSE MIB experienced a significant drop of 3.9%, while Spain’s IBEX 35 lost 3.4%. On the other side of the coin, Hong Kong’s Hang Seng Index was able to counter trend, closing 0.7% higher. This divergence demonstrates the unique reactions from various markets during a time of great uncertainty around the globe.
“Fundamentally, it will be tough to turn bullish unless and until the Trump administration begins to either make policy in a coherent manner, strike a less hawkish tone on tariffs, or begin rolling back ‘reciprocal’ duties via country-specific deals,” – Michael Brown, senior research strategist at Pepperstone London.
Shifts in Safe-Haven Assets
Where market sentiment was once bullish, the past few months have catalyzed a move to caution. Consequently, haven assets such as gold, the Japanese yen, the euro, and the Swiss franc have all risen sharply. Against the backdrop of increased uncertainty, investors bought these assets for safe haven. At the same time, US Treasuries experienced a spike in selling pressure, particularly among longer-dated government bonds, where yields jumped most acutely.
Specifically, in the US the yield on 30-year US Treasuries jumped by 20 basis points, hitting a year-high yield level. The sharp increase signals that investors are growing more pessimistic. They worry for the stability of their traditional equity markets amid ever-escalating trade war furies.
China has increased those tariffs from 34% to a mind-boggling 84%. This announcement only further complicates the already jumbled global landscape. This recent trade war represents a step in the rapid aggravation of the trade conflict and its extensive effects on global economic ties.
Regional Responses to Trade Disputes
In light of these developments, South Korea unveiled a US$2 billion emergency package aimed at supporting its struggling carmakers affected by tariff-related disruptions. Such measures are an acceptance of the reality that governments need to protect domestic industries from the deleterious effects of trade policies.
Additionally, the US Customs and Border Protection acknowledged their plans to collect the country-specific tariff from 86 countries. This significant step marks a bold new enforcement direction by this administration, one that will have far-reaching impacts for all aspects of global trade.
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