Trump Blinks on China — The Implications
Author: Greg Valliere
August 14, 2019
THE MARKETS CALL THE SHOTS: There’s no question that when it comes to U.S. policy, the stock market — not Donald Trump or Congress — usually calls the shots. That certainly was the case last December, when the Federal Reserve was forced to abandon rate hikes in the face of a market rebellion, and it certainly was true yesterday, when Donald Trump blinked on China.
THE STOCK MARKET SOLD OFF THIS AUGUST because of fears that headwinds from the tariff wars would drive the economy into recession (an over-rated fear, in our opinion). The panic seemed to peak on Monday, as normally sane analysts began to speculate about negative interest rates arriving in the U.S.
TRUMP VIEWS THE MARKETS as the ultimate arbiter of his success or failure. Most of his advisers — with the exception of the extremely controversial Peter Navarro — told the President that fresh tariffs would unsettle the markets, but he wouldn’t listen and sure enough — the stock market sold off. Trump capitulated yesterday, conceding he was worried about hurting U.S. consumers (quite a reversal from his previous mantra).
THIS REVERSAL HAS HUGE IMPLICATIONS: It’s a signal that Trump will take his signals from the markets; as we have written in recent weeks, he will leave no stone unturned in an effort to get the economy roaring ahead of the election — more spending, jawboning the dollar lower, Fed bashing, even proposing fresh tax cuts — and, of course, sending signals that a trade deal with China is coming.
BUT A TRADE DEAL IS NOT IMMINENT: Lifting tariffs on electronics and toys hardly means that Trump can get a meaningful deal this fall. His action yesterday surely will embolden the Chinese, and it has infuriated trade hard-liners like Navarro and many protectionist Democrats, from Chuck Schumer to Elizabeth Warren.
THERE ARE THREE HUGE OBSTACLES TO A TRADE DEAL: First and foremost, there are still at least a half dozen issues that are hopelessly deadlocked; it will take many months to iron these out. Second and more ominously, if Beijing moves to crush the insurrection in Hong Kong, it could elevate the Chinese to global pariah status, dashing hopes for a quick trade deal. Third, the ill will has ratcheted up dramatically, as China accuses the U.S. of fomenting the unrest in Hong Kong.
ONE PRESIDENTIAL TWEET, seemingly softening the U.S. stance on tariffs, is not sufficient to reverse the damage inflicted on U.S. farmers, who are suffering through an economic depression, or small manufacturers, who won’t get quick access to component parts. Thanks to the tariff war, a 3% economy is looking like a 2% economy.
TRUMP UNDOUBTEDLY WORRIES about slowing economic growth and its impact on the markets, so he will amp up the criticism of beleaguered Jay Powell, whose rate-cutting path may become complicated by signs that inflation is moving from cool to warm (as we have predicted all summer).
BOTTOM LINE: The good news is that the markets usually will get their way with this president, who is eager to please investors. The bad news is that Trump’s policies are extremely erratic, announced via tweets that often blindside.
THE CHINESE, facing growing unrest and a weakening economy, should be the ones eager to compromise, but they just won a premature gift from Trump, who got sweaty palms as an over-bought stock market experienced a garden-variety selloff. The Chinese will not forget the panicky precedent that has been set.
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.
© 2020 AGF Management Limited. All rights reserved.