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Investors Must Prepare for Lingering China Trade War

Investors Must Prepare for Lingering China Trade War

By    |   Monday, 15 July 2019 11:33 AM

When Fed Chair Jerome Powell recently told lawmakers that crosscurrents such as trade tensions and global-growth fears have been weighing on U.S. economic activity and its outlook, financial markets understood that the central bank's temporary “patience” was coming to an end.

This became crystal clear when the Fed chair stated that growth in business investment seemed to have slowed notably, and overall growth in the second quarter appeared to have moderated.

Powell said the slowdown in business fixed investment might reflect concerns about trade tensions and slower growth in the global economy. Housing investment and manufacturing output declined in the first quarter and also appeared to have decreased again in the second quarter.

It might be helpful for investors to recall the press conference Powell gave after the FOMC meeting of January 30-31 when he said that in light of global economic and financial developments and muted inflation pressures, the FOMC would be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.

Financial markets seem to have no doubt at all that the time for adjustments has come.

The big question for the Fed’s adjustments is “by how much?” and “when?”

Powell nailed it when he stated that apparent progress on trade has turned to greater uncertainty, and that the Fed’s contacts in business and agriculture report had heightened concerns over trade developments.

Growth indicators from around the world have disappointed, which has raised concerns that weakness in the global economy will continue to affect the U.S. economy and these concerns might have contributed to the drop in business confidence.

In this context, it might be helpful to recall that when President Donald Trump and Chinese President Xi Jinping agreed at the G-20 to proceed with trade negotiations and hold off from new tariffs, the official English-language Chinese daily (often used by Beijing to put its message out to the rest of the world) warned that even though Washington agreed to postpone additional tariffs that things were still very much up in the air, Reuters explained.

There is no indication of any important progress in reaching an end to the trade war between the U.S. and China. China has insisted that all tariffs on Chinese imports added by the U.S. during the trade war must be scrapped immediately as part of any deal to end the year-long conflict.

Trump said on March 21 that he wanted some tariffs to remain in place for a “substantial period of time,” even extending beyond any trade deal, the South China Morning Post reported.

All this means that investors shouldn't get too optimistic about a “real” positive outcome of the trade war with China in the foreseeable future. Investors should try to keep both feet on the “real” ground.

It also seems clear that a fed-funds rate cut of 0.25 percent at the end of this month is about 72 percent sure, when we take the CME FedWatch Tool as guidance.

The big question we should have is: “Will a small Fed rate cut or even a couple of rate cuts really change the overall global picture?”

Under today’s circumstances, investors should consider buying defense stocks that are normally less vulnerable to sudden global turbulences as military spending is on the rise in various important places in the world.

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

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All this means that investors could do well by not getting too optimistic about a “real” positive outcome of the trade war with China in the foreseeable future and try to remain with both feet on the “real” ground.
investors, optimistic, china, trade, war
Monday, 15 July 2019 11:33 AM
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