Tags: investors | trump | costs | taxes

Investors Poised to 'Sell the News' on China Trade Deal

3d render closeup of computer keyboard with sell button and bear.

Monday, 25 February 2019 10:40 AM Current | Bio | Archive

President Donald Trump has delayed tax burdens on Americans by postponing the March 1 tariff increase on goods partially made in China.

A summit with Chinese President Xi is promised at Mar-a-Lago.

Trump tweeted on Sunday: “....productive talks, I will be delaying the U.S. increase in tariffs now scheduled for March 1. Assuming both sides make additional progress, we will be planning a Summit for President Xi and myself, at Mar-a-Lago, to conclude an agreement. A very good weekend for U.S. & China!”

Trump also told U.S. state governors who gathered at the White House that there could be “very big news over the next week or two” if all went well in the negotiations, Reuters reported.

For investors in U.S. equities, that “could” mean we are closing in on a “sell the news” moment.

China’s official daily Xinhua comments: “China and the United States are better advised to work for the best results while preparing for the worst scenario. China sees the trade frictions as both challenges and opportunities. To realize its long-term development goal, China needs to secure its core interests and push forward deeper reforms at the same time.”

Equities have gained in Asian trade as did the Chinese currency, the yuan (CNY).

Trade tariffs are a tax on equities, at least in the first instance.

However, it has been clear for some time that Trump was keen for a trade deal. At times almost desperate for a trade deal and so while a positive reaction is justified, there is perhaps a limit to the upside.

It’s worth noting that the U.S. S&P 500 equity index, which is widely regarded as the best gauge of large-cap U.S. equities, is not quite back to the levels it was at in October last year just before the tariff hikes were threatened, although it’s moving in that direction.

For investors, it’s important to keep in mind that during the last six months “costs” have been created for companies and have added a risk premium that will need to be considered in the future.

As well as the delayed trade tariffs, Chinese President Xi Jingping has been offering some support by suggesting on Friday there may be more emphasis on growth in China, specifically, President Xi Jingping talked about risk prevention on the basis of stable growth at a study session of the Politbureau of the Chinese Communist Party, Reuters said. That would mean that growth will have a higher priority than in the recent past.

The People’s Bank of China (PBOC) monetary report also referenced stable and prudent policy but not neutral policy, which is taken as another signal stressing growth, Reuters explained.

China’s growth is still above its long-term trend, which probably hovers at around 5 percent. Even if you do not believe the official data as if anyone could doubt China’s official data, the current growth rate is probably some way above that.

A managed decline towards the long-term growth rate is ultimately needed, but the pace of that decline reflects political pressures.

A credit crunch seems very unlikely given the risks that such a reduction in debt would imply but the tone of the policy does seem to have shifted.

Over in the UK, Prime Minister May has delayed a final vote to March 12 in Parliament on the interminably tedious process of exiting the European Union that would give Parliament the ability to delay the exit date if nothing is agreed by March 13, the BBC said.

Of course, any final vote is unlikely to be final.

One point of interest is if there were any more members of the main political parties quitting their ranks to join the independent group and whether that would affect any of the outcomes.

Meanwhile, there have been some mutterings from the European Union that any delay to the exit could be set for 2021 with thereafter the prospect of another two years of talking about the final settlement that follows the exit, The Guardian reported.

For investors it’s important to keep in mind that the uncertainty entailed in that would be damaging for the U.K. economy.

An exit delay now seems almost inevitable.

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

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For investors in U.S. equities that “could” mean we are closing in on a “sell the news” moment.
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Monday, 25 February 2019 10:40 AM
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