Trade, the G7 and Jackson Hole: Monday Briefing

August 26, 2019

From Friday until today, three main events were monitored by markets.

  • The escalation in the trade dispute between China and the US
  • The G7 summit in Biarritz
  • The Jackson Hole symposium of central bankers from around the world

Trade War Escalation

On Friday afternoon, Beijing announced additional tariffs in a range of 5 to 10% on $75bn of US imports. The targeted products were divided into two lists: The first which contained 270 items such a seafood,  frozen pork and nuts will be hit with levies come September 1st. Tariffs on the second list (which includes 749 items such as coffee, bikes, whiskey and cigars) will become applicable on December 15th. This Chinese authorities also announced that a 25% tariff on US automobiles and auto parts will be reinstated by December 15th.

The US quickly retaliated with more tariffs of its own, citing the intention to raise existing tariffs on $250bn worth of Chinese imports from 25% to 30% on October 1st. It also said that the fresh tariffs announced at the beginning of August on $300bn worth of goods would be increased from 10% to 15%. The first batch of those tariffs will come into effect in September.

But in addition to this, Mr Trump issued an unprecedented threat, saying he could declare a national emergency in an attempt to ‘order’ US businesses to cut ties with China. The President subsequently said that he had ‘no plans right now’ to follow through on the emergency declaration, but insisted he would be within his rights to use a 1977 law used to target rogue regimes, terrorists and drug traffickers in the stand-off.

China’s renminbi weakened to a new 11-year low on Monday but global markets stabilised after Mr Trump said China has requested to get back around the negotiating table, adding that he was optimistic about the prospects for an agreement. Risk assets managed to edge upwards and safe haven assets such as gold and the Japanese yen gave up some ground.

G7 Summit in Biarritz

French President, Emmanuel Macron, hosted leaders from seven of the world’s wealthiest economies with today being the latest day of talks in Biarritz. The group consisting of Canada, France, Germany, Italy, Japan, the UK and the US, was formed in 1975 and has the primary objective of promoting world economic stability.

Source: BBC 23/8/29

However, at the last minute, the Amazon forest fires climbed to the highest realms of the agenda, after Macron declared an ‘international crisis’, given that the Amazon provides 20% of Earth’s oxygen. As it stands, Macron has said that the group is close to an agreement on how to help fight the flames and try to repair the damage. This came after Brazilian President Jair Bolsonaro, caved into intense international scrutiny, and decided to send the army to fight the fires. Brazilian business leaders had expressed growing concern that the fires would result in a loss of competitiveness or even boycotts as environmentally conscious buyers turn away from Brazilian produce. Macron and other European leaders had suggested that the EU-Mercosur trade deal could be a stake if Brazil did not do more to battle the blazes and Finland (which holds the EU’s rotating presidency) called for the bloc to examine the possibility of banning Brazilian beef.

Also at the top of the agenda was of course trade – a theme that has dominated markets for over a year. President Trump’s counterparts, including Boris Johnson, tried to persuade the US to step away from the precipice of a full-blown trade  war with China, a prospect which is already weighing on global growth.  Johnson said “I want to see an opening up of global trade, I want to see a dialling down of tensions, and I want to see tariffs come off.’ Indeed on Monday, Trump said that trade negotiations with China were to resume after the two sides shared a phone call.

There has been progress on some trade issues on the side-lines of the event, with the U.S. and Japan agreeing a new deal in principle, and France and the U.S. drafting an agreement to prevent an escalation of the tensions over the new French digital services tax.

Jackson Hole Central Bank Symposium

The world’s top central bankers met in Jackson Hole, Wyoming, to discuss the state of the global economy and the future of monetary policy. The key takeaway seemed to be that we are now operating in a ‘new normal’ of lower for longer when it comes to policy rates. It is not imagined that policy rates will rise again to 5% or that central bank balance sheets will return to zero any time soon. The central bank collective acknowledged that they will need to develop and deploy new tools to deal with the new terrain.

The dollar’s role as a safe haven asset and as a medium of exchange was called into question due to perpetual uncertainty with regard to US trade policies under the current administration. The Governor of the Bank of England, Mark Carney, pointed out that even though  the US accounts for only 10% of global trade and 15% of global GDP, the dollar is used to price 50% of trade invoices and two-thirds of global securities issuance. He purported that this creates distortions in the global monetary system that undermine the effectiveness of policy making. He went on to make a radical suggestion that a private or state-run digital currency could serve as a global counterbalance to the dollar. But he and others acknowledged that there was no realistic mechanism to decouple the global economy from the US dollar in the short-term.

Radical ideas and radical footwear: Bank of England Governor, Mark Carney, in Nike AirMax trainers with Federal Reserve Chairman, Jerome Powell at Jackson Hole. Source: Arkansas Online

Much anticipated was the Federal Reserve, Jerome Powell’s, speech. However, he gave no new clues about the outlook for interest rates, echoing his previous assertion: “We will act as appropriate to sustain the expansion.”

He said, that at the moment, all the Fed can really do is “try to look through what may be passing events” (i.e. ongoing trade turbulence) and examine how trade policy is actually affecting the outlook. He described the US economy as being in pretty good shape with “solid” job growth and rising wages supporting consumption and “moderate” growth.

Author: Group Investment Office