Strained China-U.S. trade relations continued Monday when the U.S. Treasury labeled the Chinese government a currency manipulator after a sharp drop in the Chinese yuan. The weaker yuan can be seen as a trade balance tool because it reduces the net cost of Chinese exports to other countries. Surprisingly, despite the current tariffs, Chinese economic data released Thursday revealed that Chinese exports grew 3.3% in the month of July, with imports decreasing 5.6%. These results were far stronger than analyst projections of a 1.0% decline in exports and 9.0% drop in imports. Mirroring the U.S., global protectionism escalated this week as Japan and South Korea took each other off their lists of favored trading partners. Pakistan also announced it would halt trade with India in response to an issue regarding the disputed region of Kashmir.
Markets dropped dramatically Monday and again early Wednesday on international trade developments. However, a strong turnaround during the trading day on Wednesday led markets to a swift recovery. Large cap domestic stocks ended the week only slightly down. Domestic small cap stocks closed the week lower as did international developed and emerging market stocks. Interest rates also fell as escalating trade tensions continued to dampen the economic outlook and strengthen the case for more rate cuts. The 10-Year Treasury yield dipped below 1.6% and ended the week at 1.74%.
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