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Breakfast Bites - China Hits Back with Tariffs

Breakfast Bites - China Hits Back with Tariffs

Ayesha Tariq
February 04, 2025

Rise and shine everyone.

China’s unexpected counter-tariffs against the US disrupted an otherwise positive, risk-on market session. The announcement came shortly after the US imposed an additional 10% tariff on Chinese goods, which took effect at midnight ET.

Following the news, markets reacted sharply. Crude oil fell 1.5%, while EUR dropped 1%, AUD declined 0.8%, and BTC lost 2.5%.

The Nasdaq reversed from a 0.8% gain to a 0.7% loss, though shares later pared their worst losses. Despite the shock, markets had initially rebounded after yesterday’s steep declines, largely due to Canada and Mexico securing a 30-day delay on Trump’s tariffs. Both countries agreed to deploy 10,000 troops to help secure US borders against fentanyl trafficking, and Trump hinted at further trade and economic negotiations over the next month.

Markets welcomed this as a sign that Trump remains open to deals, suggesting future tariff announcements might not be long-term measures. Asian equities recovered most of their losses, with the Hang Seng surging 3.5% at one point, led by Hang Seng Tech (+5%). However, as the midnight deadline approached, gains were trimmed to 2.1%, possibly reflecting uncertainty over a last-minute Trump tariff reprieve.

European markets also started lower, reflecting concerns over escalating trade tensions. Rumors of potential 10% tariffs on EU imports weighed on sentiment, with GBP weakening to $1.24 due to tariff uncertainties and growing expectations of three BoE rate cuts this year. Markets see a 98% chance of a rate cut to 4.50% this Thursday. Meanwhile, EUR remained near three-week lows at $1.03, pressured by the ECB’s dovish outlook and ongoing trade disputes. European natural gas prices retreated from recent highs, as US LNG was redirected following China’s tariffs, raising concerns over Europe’s gas storage levels.

In the US, the Treasury released preliminary estimates of marketable borrowings, with the full Quarterly Refunding details set for Wednesday, February 5. While overall estimates have dropped marginally, no major changes to coupon estimates are expected. However, markets will be watching newly appointed Treasury Secretary Scott Bessent closely for signals on his policy direction.

Meanwhile, in Japan, a well-supported 10-year JGB auction pushed yields to 1.257%, the highest since May 2010. The 2-year yield rose to 0.74% (highest since Oct 2008), while the 5-year yield climbed to 0.925% (highest since Nov 2008). BOJ Governor Ueda addressed parliament but offered no new policy insights.

What we know about China’s Tariffs

China is set to impose counter-tariffs on U.S. imports, effective February 10:

15% tariffs on coal and LNG
10% tariffs on oil and agricultural machinery

Additionally, China has:

Added U.S. companies Alumina and PVH Group to its unreliable entity list
Imposed export controls on tungsten, tellurium, ruthenium, molybdenum, and related materials, citing national interest
Confirmed the tariffs are a response to the 10% tariffs imposed by the Trump administration

China’s Ministry of Commerce and Finance Ministry reaffirmed these measures as part of its economic countermeasures.