U.S. trade relations and tensions with China have made again another ‘turnaround’ and appear to confirm an increasingly predictable pattern that should cause a rethink for anybody hoping for a rapid resolution to this very serious matter.
Markets were getting excited about the prospect of trade talks between China and the United States after Treasury Secretary Steven Mnuchin had invited his Chinese counterparts to sit down for further high-level negotiations. Yesterday, President Trump tweeted: “The Wall Street Journal has it wrong, we are under no pressure to make a deal with China, they are under pressure to make a deal with us. Our markets are surging, theirs are collapsing. We will soon be taking in Billions in Tariffs & making products at home. If we meet, we meet?”
While it is true that Chinese equities have underperformed U.S. equities, that does not actually mean that the Chinese are in dire straits.
One has always to account for “initial relative valuations” that are the relative importance of trade to equity markets, and the relative unimportance of equity markets to economies.
This attitude is important however because Mr. Trump’s tweet indicates that he might believe the U.S. has an advantage in negotiations it does not actually has and his conviction might spoil the ‘art of the deal’ if Mr. Trump has the final say from the U.S. side.
Economic data from the U.S. and China
As if to demonstrate the relative indifference, the Chinese published retail sales and industrial production data overnight.
Chinese retail sales increased 9 percent year-over-year (y/y) in August while in the U.S. retail sales increased 6.4 percent y/y in July.
The Commerce Department said on Friday retail sales edged up 0.1 percent last month, the smallest rise since February. Data for July was revised higher to show sales rising 0.7 percent instead of the previously reported 0.5 percent gain.
The Labor Department said on Friday import prices fell 0.6 percent last month. That was the largest decline since January 2016 and followed a downwardly revised 0.1 percent dip in July.
Industrial production in China rose by 6.1 percent in August while U.S. industrial production rose by 4.2 percent y/y in July.
Of course, these comparisons are meaningless, which is rather the point.
Overall, the Chinese economy is performing largely as expected.
U.S. retail sales and industrial production data are due out today and are not likely to be either 9 percent or 6.1 percent respectively.
It is important to note, these will not include the increasing burden of tariffs that is being implied to the American consumer. Tariffs appear in the data after the import prices are calculated.
Emerging Markets - Turkey
One could say that the Turkish central bank was moderately interesting yesterday, raising interest rates to 24 percent, which was more than had been expected. This was of course in direct contradiction of the monetary theory of Turkish President Erdogan who believes that ‘lower’ interest rates ‘lower’ inflation.
As it turns out, financial markets are not disciples of Erdogan’s economic philosophy and the Turkish lira (TRY) has rallied to levels not seen in… more than two (2) weeks from 6.7575 TRY per dollar on August 30 to about 6.09 TRY per dollar now.
Investors could do well keeping in mind that at the beginning of the year to buy one (1) dollar one needed 3.78 TRY Turkish lira and now one needs 6.09 TRY Turkish lira to buy 1 dollar.
The reaction to Turkey’s interest-rate hike from local investors suggests the lira still faces an uphill struggle. Companies and households bought up to $2 billion worth of foreign currency following yesterday’s rate hike to 24 percent.
I think investors could do well keeping in mind that ‘local firms’ have a net $216 billion of foreign-currency liabilities.
The Turkish central bank has promised to keep monetary policy tight for the remainder of the year and has acknowledged that a mild recession is better than a severe crisis.
Today the Turkish central bank published the current account balance for the month of July, which is something investors will have to look to. This represents Turkish need for foreign capital to flow into the country and it is of course reluctance of foreign capital to flow into the country that has contributed to the weakness of the Turkish lira.
The current account deficit in Turkey fell to $1.75 billion in July from $4.71 year-on-year, but somewhat lower than market expectations of a $1.8 billion deficit. Considering the first seven months of the year, the current account gap widened to $33.13 billion from $26.00 billion.
No, Turkey is not out of the woods yet.
I personally think it is still too early to step back in into emerging markets overall.
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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