Tags: china | trump | g20 | trade | tariff

Investors Should Be Wary of Trump, China's 'Handshake' G-20 Deal

pair of businessmen shaking hands with an american flag and money falling down around them
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Monday, 03 December 2018 10:56 AM Current | Bio | Archive

Markets are breathing easier after we got a “handshake deal” between President Donald Trump and his Chinese counterpart Xi Jingping that grants a 90-day respite for new tariffs that were to be applied on January 1.

Investors should keep in mind that the reality of the U.S.-China handshake deal at the G-20 is not perhaps quite as secure as it could look at first sight. I think it might be wiser not to lose sight of the forest for a few trees.

The question now is what occurs in the next 90 days.

It’s really interesting to take notice how differently the Chinese and the U.S. reported the “truce deal” between Trump and Xi Jingping.

For example, the Chinese statement did not mention the 90-day deadline, the requirement that China begins buying more U.S. farm, energy and other products, or China must immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture.

Beijing will no doubt attempt to make good on its pledge to increase purchases of U.S. goods, turning probably to soybeans and potentially energy.

That alone, however, won’t satisfy Trump’s most hawkish advisers on trade, including U.S. Trade Representative Robert Lighthizer and adviser Peter Navarro.

I don’t think it’s an overstatement to say that the G-20 handshake deal grants temporary respite, but does not come close to setting in place a clear way out of the trade war.

The deeper, fundamental divergences between the two sides will remain well in place and are unlikely to be ironed out in just 90 days.

The handshake deal does not mean that the U.S. consumer will be immune from tariff increases. U.S. retailers stockpiled ahead of the holiday spending season, which means that a decent proportion of the goods currently being sold to Americans were imported into the U.S. before the 10 percent tariff was imposed.

Manufacturing ISM Report On Business in November

The November 2018 Manufacturing ISM PMI came in stronger than expected at 59.3 percent in November, up from 57.7 percent in October and beating consensus of 57.2 with:

  • New Orders, Production, and Employment Growing
  • Supplier Deliveries Slowing at Slower Rate; Backlog Growing
  • Raw Materials Inventories Growing; Customers’ Inventories Too Low
  • Prices Increasing at Slower Rate; Exports and Imports Growing
  • The overall economy is growing faster and the manufacturing sector is also growing faster

The higher than expected reading should be taken as positive/bullish for the dollar, but as we know, there are also other drivers at work as well.

Anyway, I remain positive on the dollar and not at least when I look at what goes on in the rest of the world.

IHS Markit Flash Eurozone Composite Output PMI

The IHS Markit Eurozone Composite PMI dropped to 52.4 in November from 53.1 in October, a 47-month low.

The latest reading pointed to the weakest pace of expansion in the private sector since December 2014 as services activity rose the least in over two years and manufacturing growth slowed to a 30-month low.

New business rose at the slowest pace since the start of 2015, with new export orders falling for a second successive month, and exports posted the largest slump in four years.

Price pressures remained elevated and employment growth dropped to a 22-month low and. Expectations of growth in the coming year sank to a 4-year low amid subdued global demand, rising political and economic uncertainty, trade wars and especially sluggish car sales.

The PMI readings for the 4th quarter GDP point to 0.3 percent growth rate for the Eurozone.

Caixin China General Manufacturing PMI

The Caixin China General Manufacturing PMI came in at 50.2 in November 2018, little-changed from the previous month at 50.1, slightly above market consensus of 50.1.

While new orders rose a bit faster; output was stable for the second month in a row; and export sales fell for the eight straight month, indicating the impact of the Sino-US trade friction on outbound shipments.

At the same time, relatively muted client demand and efforts to lower costs contributed to a further reduction in staff numbers.

On the price front, inflationary pressures eased, with input costs increasing the least in seven months and selling prices falling for the first time in 1-1/2 years amid efforts to attract new business.

The overall, China’s economy was weak, but did not show significant signs of deterioration.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Now, for investors it might be good to keep in mind that the reality of the U.S.-China handshake deal at the G-20 is not perhaps quite as secure as it could look at first sight. I think it might be wiser not to lose sight of the forest for a few trees.
china, trump, g20, trade, tariff
Monday, 03 December 2018 10:56 AM
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