Trade Truce or No Truce?
The trade dispute with China and the Federal Reserve’s (Fed) continual hiking of interest rates are the two most important drivers of the market’s recent volatility. We had a great lineup on Friday’s “Behind the Markets” podcast discussing these two critical issues, which included Wharton Professor Jeremy Siegel, Liqian Ren of WisdomTree, Marc Chandler of Bannockburn Global Forex and Andy Rothman of Matthews Asia.
Professor Siegel believes the speech last week by Federal Reserve Chairman Jerome Powell and his critical words “the Fed Funds Rate is not far from the neutral rate” settles Trump’s assault on Powell as the whipping boy and cause of market volatility—now the primary issue Trump must confront for causing market volatility is his trade dispute with China.
Although the headlines over the weekend were positive and we’ve avoided the worst-case scenario, the issues are far from solved.
Chandler was the glummest and most concerned of our podcast participants and suggested we’ve entered a new “Cold War” with China that will divide the world. He highlighted a clause in the new North American Free Trade Agreement with Canada and Mexico that forbids entering into a trade agreement with a non-market economy (code for China). Chandler thinks this was precedent-setting and future trade agreements with Europe will contain a similar clause. China is also taking a similar tack in their global deals by saying that if you want Chinese aid, you cannot recognize Taiwan.
Going into the G20 meetings this past weekend, Rothman did not think we would get a full resolution, but rather that we would see signs of a truce. Rothman pointed out how even Trump’s own economic team finds a trade war could subtract 50 to 100 basis points off GDP growth in 2019, and this is affecting the markets, sentiment and corporate profits—all against Trump goals. It turned out that Rothman was exactly right, as President Trump’s and President Xi’s teams met during the summit and agreed to a 90-day “ceasefire” of the trade war.
Rothman believes a changing tone and direction of bilateral conversations with China could create an opportunity in the Chinese markets—lifting concerns and pessimism. He sees earnings growth as being good, valuations as being depressed, and macro conditions also as pretty good.
Rothman also believes China is the world’s best consumer story—with phenomenal growth in income driving phenomenal growth in retail sales—all while savings rates are still high.
Ren further questioned framing the tensions between China and the U.S. as a “trade war.” She sees this as a “dispute,” but overall, she also questioned pessimism of guaranteed losers in this trade dispute. She pointed out that Chinese social media posts often welcomed the trade tariffs President Trump enacted because China’s response was to lower their internal taxes—making many American-made goods, such as cancer drugs and cars, cheaper for Chinese consumers.
This supports Rothman’s view that China is the world’s best consumer story, and the pause to negotiate trade issues is more of a catalyst to revisit exposures to the battered-down emerging markets.
One cautious note: Ren pointed out over the weekend that Chinese news reports of the dinner conversations had a very different tone and explanation than U.S. stories. While the market initially cheered Trump’s message, we may be back three months from now facing a new round of tariff debates. Unfortunately, this new tariff dispute and uncertainty feels like the new normal and an issue we will be coming back to again and again over the coming months.
Please listen to our full podcast below.