A sign of hope
Likely US-China mini trade deal

US and Chinese trade negotiators met Thursday and Friday to de-escalate trade tensions and move towards a small trade agreement. All indications are that it will be an unexpected success with the Chinese Vice President set to meet President Donald Trump this Friday.

Both countries have imposed on each other severe tariff increases with a 15% increase on 110 billion in Chinese goods coming up very soon. The impact has been a severe hit on Chinese manufacturing far worse it seems than suggested by official data. The size of the impact can be clearly seen in Swedish, German and even US manufacturing PMI data. Much of this increase in tariffs has been passed on to US consumers. The process of outsourcing out of China has started and should reverse this moderate impact on US inflation, an impact that will increase ahead of the year-end celebrations.

Given this tariff war, equities in Asia, Germany, Sweden and even US growth stocks have suffered over the past few weeks. The idea of a small trade agreement is now a boon to such markets and any lesser demand for safe haven fixed income is likely to be temporary. Indeed, we are still in a world of moderate growth and inflationary pressures. Note that EM equities outside of India are quite cheap and this is a very positive development.
In the latest round of talks, Politico mentions that China is opening its financial and automobile markets, something it can easily close again. It promises old style Intellectual Property Protection which will likely depend on active enforcement as well as a currency agreement, which, according to Secretary of the Treasury Steven Mnuchin, is almost done and similar to that of the North American trade agreement (USMCA). This stipulates that countries can’t devalue to gain a competitive advantage and there is no mechanism of enforcement. What is not mentioned is a commitment to agriculture, but that is likely a done deal. Overall, therefore, manufacturing and agriculture are likely addressed and are at the core of what the US president needs for his constituency, as was widely expected.

Looking beyond this, the Trump administration will enter far more difficult waters such as forced technology transfers in the next round of negotiations that will likely last well into 2020. Furthermore, China’s goodwill is necessary to maintain the agreement which severely limits the value of further threats by the US administration, overall a very welcome development for the equity market.

By reaching a very likely trade deal that largely depends on China’s goodwill, we have reached a far better place for Asian, Germans and Swedish equities as well as US growth stocks. Looking forward, a potential reversal of some tariffs is likely to further help such equity indices. Both presidents need this lever to improve their weakening economies and trade negotiators are cognizant of this fact. Therefore, the odds are increasing significantly that tariffs are slowly but steadily going to be reversed or delayed.

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