The most recent round of US-China trade talks have ended and the parties leave Shanghai further away from finding agreement. As the diplomats and negotiators leave the table, the communication between the two nations reverts to their leaders throwing long-range acidic barbs at each other.
The dollar was weaker on the forex markets.
EUR/USD – Five-day chart
EUR/USD – Five-year chart
USD/JPY – Five-day chart
The USD/JPY price chart shows what an eventful week the dollar is having. Midweek, it strengthened to the all-important 109 level and is currently trading around 107. The two moves are explained by the Fed giving more hawkish signs regarding interest rates, followed in quick succession by the breakdown of trade talks.
S&P index futures have fallen further away from their all-time highs posted earlier this week. If any perma-bears were “brave or stupid” enough to put on a short at the record levels, they’ll be looking to take profits into the weekend.
S&P 500 – Five-day price chart
UK100 – Five-day chart
How much of the fall in the equity markets can be directly attributed to the trade talks is a moot point. From a fundamental perspective, this week is very busy in terms of news flow. Apple Inc. reported Q2 earnings and epitomised the recent earnings season being one that is a mixture of current good news and the realisation that future earnings estimates might be too optimistic. The US Fed announced an interest rate cut of 25 basis points, and probably the most eagerly anticipated data release is the US jobs report due on Friday 2 August. From a technical perspective as well, there could be a case for the equity markets showing weakness, with the S&P 500, for example, trading near to significant resistance levels.
VIX Index – One-month price
Unsurprisingly, the events of this week have woken the VIX Index from its month-long slumber.
In the run-up to the Shanghai talks, expectations were low. The general opinion was that the best-case outcome from the talks would be a road map towards future progress and some demonstrative if immaterial concessions. Even with the bar set so low, both negotiating teams failed to clear it.
The US side felt that the talks were not moving fast enough and that China had broken promises to buy American agricultural goods. President Trump specifically referenced Fentanyl. China’s failure to deliver on the promise to ban exports of it to the US highlights the missed opportunities to show goodwill by doing deals in high-profile but low-impact markets.
There is no doubt that the Chinese government has an active policy to transform its economy from a low-cost manufacturer into the global leader in tech and innovation. A direct consequence of this is that US firms are restricted in what they can do in China. Government regulation protects local firms but keeps the US companies in close enough range so that their intellectual property can be milked out of them.
The World Trade Organisation, which is positioned to judge on such conflicts, has deemed the US tariffs “legal”, though the use of “301” legislation rather than any application of internationally agreed principles has been called into question. That China refers to the position of the WTO is both significant and ironic as the creation of the institution was largely driven by the US, which has always wanted to demonstrate being above the law.
The details of the new sanctions were released via the means of a Presidential Tweet.
“Trade talks are continuing, and……during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%.
…We look forward to continuing our positive dialogue with China on a comprehensive Trade Deal, and feel that the future between our two countries will be a very bright one!”
China’s Foreign Minister Wang Yi, speaking in Bangkok, criticised the US move. He said:
“Adding tariffs is definitely not a constructive way to resolve economic and trade frictions, it’s not the correct way.”
The new tariffs are to some extent symbolic but still pack a heavy punch.
Reports are that the Chinese administration is now considering holding its position until after the US Presidential campaign – the thinking being that Chinese fiscal policy can ameliorate any downside until Q4 2020.
With stalemate achieved, we can look forward to more verbal sparring and the conflict being played out in public. Geoffrey Garrett, Dean at the Wharton School, said:
“It is best to view things like trade spats between China and the US as well-choreographed theater designed to appease domestic political audiences without threatening the underlying big economic win-wins between the two countries. It is easy to fit ‘steel for soybeans’ tit-for-tat tariffs into that frame.”
Source: Wharton Magazine
Trump is without doubt an incredible publicist. During this stalemate, expect to see an explanation of “how we got here” to feature few characters from the White House. The US Federal Reserve has already faced public admonishment for failing to align its interest rate policy with the President’s own “wish list”.
The problem that Trump faces is that rhetoric is hard to manage. Coverage of US firms struggling because imports from China are now much more expensive will be valuable ammunition for Trump’s rivals. The aid package released to US farmers looks set to clear the way for his campaigning in Mid-West states, but also goes to confirm that the Trump administration can’t plug every gap, all of the time.
Trump could be the first US president for a long time to see out a term in the White House and not engage in significant military action. This would be a worthy achievement, but there are votes for looking tough on the international stage.
Garrett points out that “manageable, orchestrated trade skirmishes” are probably the right description. However, “trade war” is so much better a headline.