Trade dispute main event remains unresolved

Thought of the day

by Chief Investment Office 10 Jun 2019

Global equity markets gained ground on Monday, encouraged after the US administration dropped its threat to impose import tariffs on Mexico later today. Stock indices rallied across Asia (MSCI AxJ +1.0%) and Europe (Stoxx Europe 600 +0.2%). US equity futures also rallied (S&P mini +0.3%) and the Mexican peso (USDMXN –2.2%) gained ground. President Donald Trump declared tariffs were “indefinitely suspended” and a joint declaration showed Mexico had promised changes to how it polices its borders and deals with US asylum seekers.

President Trump’s decision to avoid opening a second front on trade is encouraging. But the US-China trade dispute remains more important in our view, and tariff troubles there remain unresolved:

  • The US reportedly watered down the language on tariffs and trade in the communique from this weekend’s G20 finance ministers meeting. US Treasury Secretary Steven Mnuchin warned that President Trump was “perfectly happy” to impose more tariffs and indicated that the starting points for talks would be the previous rejected draft. With no further high-level meetings before the Xi-Trump meeting later this month, there’s little room for negotiations.
  • China’s position appears to be hardening, with the National Development and Reform Commission (NDRC) on Saturday announcing a “national security technological security management list.” A number of US tech giants were reportedly warned by Beijing of the consequences of complying with US supplier restrictions on Chinese telecoms company Huawei.
  • Chinese trade data suggests companies aren’t positioning for an improvement. May exports climbed 1.0% y/y on front-loading of shipments ahead of potential incremental tariffs, sending China’s goods surplus with the US to a four-month high. Meanwhile, import growth contracted 8.5% y/y amid weakening domestic demand. The People’s Bank of China also indicated that 7.0 may not be a line in the sand for USDCNY, suggesting tariff pain may be overshadowing concerns around currency depreciation.
    So while President Trump's swift resolution of the dispute with Mexico is positive, we see a bumpier road ahead for negotiations with China. Our base case is for a deal to be reached eventually, but focus is now turning to the G20 summit at the end of the month, and we see only a 20% chance that an agreement is announced by then. Our overall six- to 12-month tactical positioning continues to overweight equities, but with a regionally selective approach. In the near term, given downside risks, we also recommend counter cyclical positions.

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