The Markets Are Getting Ahead of Themselves on Trade Deals
Author: Greg Valliere
February 20, 2019
THERE’S A MARKET CONSENSUS that trade disputes will subside ahead of the U.S. elections, which — logically — makes sense. But logic is in short supply in this hyper-partisan city, and while we’re cautiously optimistic on trade deals, we think the markets are getting way ahead of themselves on three fronts.
FIRST AND MOST IMPORTANTLY, there’s no chance a U.S.-China deal can be finished by the March 1 deadline, even though negotiators from both countries are feverishly wading though issues this week in Washington. The markets almost unanimously expect the deadline will be extended for weeks or months, which seems probable.
BUT LET’S NOT OVERLOOK why the deadline will have to be extended: there’s no agreement yet on huge issues — the dominance of Chinese state-owned monopolies; China’s theft of technology and intellectual property; and how a trade deal would be enforced. Resolving these and other issues will take a lot of time.
COMPLICATING THESE TALKS are the maddeningly inconsistent statements from Donald Trump and his advisers, who sound hawkish on one day then conciliatory the next. The president will keep everyone guessing for the next few months; he loves the drama, so there will be highs and lows before he meets with Chinese President Xi — and until that meeting is scheduled, there will be no deal. Trump wants a reality show blockbuster; a deal will not be announced by mere negotiators.
WE THINK THERE’S A 65 PERCENT CHANCE of a U.S.-China trade agreement in principle in a few months; Trump will proclaim it as a historic victory but it will take months more to iron out all of the details. Yet many investors view this as a done deal — and while it’s likely, it’s far from a sure bet.
THEN THERE’S AUTO TARIFFS: Trump received a secret Commerce Department report this weekend on autos, which may have concluded there are barriers to U.S. sales in Europe, Japan and elsewhere. He’s still considering 25% tariffs — a prospect that prompted a scathing rebuke from Angela Merkel this past weekend; she noted that most BMWs sold in the U.S. are manufactured in South Carolina.
KNOWING HOW TRUMP NEGOTIATES, we would not be surprised to see him impose auto tariffs simply to send a message to the Chinese that he’s capable of playing very tough. We think there’s at least a 50% chance that Trump will impose auto tariffs in the next few weeks, which would prompt retaliation.
FINALLY, THERE’S THE NAFTA REPLACEMENT: We joke that the main difference between NAFTA and the new deal is the acronym. But there are provisions in the new USMCA that have encountered fierce opposition in the House, were Nancy Pelosi is in no rush to ratify a deal that’s opposed by organized labor and environmentalists. Chances are below 50% that the deal will win ratification any time soon; U.S. steel and aluminum tariffs will complicate the debate.
BOTTOM LINE: We don’t expect the eruption of an all-out trade war anytime soon, but the market view that trade will subside as an irritant is way too sanguine. Trade uncertainty will persist for the next few months.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
© 2019 AGF Management Limited. All rights reserved.