August 14, 2019
Yesterday, the plot thickened with regard to the ongoing trade dispute between the US and China. This time risk assets were offered some relief, with Trump postponing tariffs on certain Chinese imports until December 15th. However, as our equity analysts point out – this just kicks the can further down the road, and signals more months without clarity for businesses and investors alike.
Let’s begin with a brief synopsis of what has already played out during August.
Hopes were high at the onset of the month, with high-profile delegates from the US and China getting back around the negotiating table after Trump and Xi broke bread at the G20 meeting in Osaka. This was the first face-to-face encounter of the two countries’ trade negotiators since talks fizzled out in May. The location was chosen as Shanghai – and some commentators suggested that by selecting this global financial hub, rather than the political centre, Beijing, China was trying to play down the political aspects of the talks and emphasize the commercial elements.
Once the talks were underway, markets were given a further beacon of hope, with Trump stating that the talks were moving ahead in a ‘constructive’ fashion.
One day later, the President threw an almighty curve ball. He criticized China for failing to buy large quantities of agricultural products (primarily soybeans) as had been promised, and for failing to prevent the flow of Fentanyl to the US. As a consequence, he said, 10% tariffs would be levied on the remainder of Chinese exports to the US, beginning September 1st. The tariffs would impact about $300bn worth of goods, covering a wide array of consumer products from clothing to toys to computers. At the same time, the President did not close the door on further dialogue with China, ending with: “we look forward to continuing our positive dialogue with China on a comprehensive trade deal”.
On the same day, the Chinese administration announced that it would have to take “necessary countermeasures”. The government instructed Chinese state-owned enterprises to suspend all imports of US agricultural products and the central bank (the Peoples’ Bank of China) allowed the Yuan to slip past the psychologically important threshold of 7 USD. It blamed trade protectionism and tariffs on Chinese goods for the move.
This represented a marked escalation in the trade dispute which is already taking its toll on global growth, and major equity bourses around the globe turned vermillion red. MSCI’s broadest index of world shares, which tracks 47 countries, suffered one of its worst days in years. US and European indices lost close to 5% and touched their 200-day moving averages which had appeared distant just days beforehand. With investors lured towards safe havens, gold surged past $1,500 a troy ounce for the first time in over 6 years (year-to-date, its price has risen some 17%) while silver skipped past $17 per ounce.
In retaliation, the US Treasury department labeled China a currency manipulator, and called for the Federal Reserve to respond. No country has officially been named a currency manipulator by the US since Bill Clinton’s administration labelled China as such in 1994. However, our analysts point out that in fact, care must be taken when labelling China in such a way, because, since the 2008 global financial crisis, China has gone to great lengths in order to prevent its currency breaching this floor.
(13th August), the US administration changed tack again. Speaking from
New Jersey, Donald Trump said he was delaying the new tariffs on some products
(such as computers and phones) to protect US shoppers “for the Christmas
season”. The Financial Times calculates that the value of the goods that
would see delayed tariffs is about $156bn, based on full-year 2018 figures.
The decision was apparently the by-product of high level telephone talks between
US and Chinese officials. In two weeks’ time, a further conversation has been penciled
However, US businesses are not overly optimistic. Peter Robinson, president of the US Council of International Business, a lobby group for big multinationals in Washington was quotes as saying, “Simply delaying harmful tariffs on a select number of particularly impacted products from September 1st to December 15th is not a solution.” Indeed, tariffs are starting to put pressure on the domestic economy. With the 2020 elections in sight, Trump will have to play his cards carefully.
China also has its eye on the calendar and, at present, it is very unlikely that the Government will be seen to bow to any US demands, especially as we approach the 70th anniversary of the People’s Republic of China on October 1st when the mood is one of extreme patriotism.
In anticipation of more twists and turns in the trade spat, our portfolios are lined with a layer of core government bonds which cushion against some of the volatility that is being injected into markets. We have also hedged part of our equity exposure via a put option, with an expiry date of September 19th (bearing in mind that the next Federal Reserve meeting is on September 17-18th).
Author: Group Investment Office