Tags: china | trade | investors | deficit

I Doubt Any China-US Deal Will Actually Lower Deficit

I Doubt Any China-US Deal Will Actually Lower Deficit

Monday, 21 May 2018 12:23 PM Current | Bio | Archive

Sino–US Trade

China and the United States have agreed not to increase the tax burden on their own consumers, at least not for the time being, and as Treasury Secretary Steven Mnuchin said the U.S. was “putting the trade war on hold.”

In other words, the trade tariffs that each side has been threatening with, will not be applied, so far. The focus of negotiations has been on substantially reducing the bilateral trade deficit between the United States and China.

In fact, that could be done quite easily by shifting the last stage of production of goods partially made in China to a different country. It is the last location of long and complex supply chains that create bilateral trade numbers.

No specifics around the deal have been put in place.

Now, will any deal reduce the U.S. trade deficit overall? I must admit that I have serious doubts.

For investors it remains important keeping in mind that the trade truce could be short-lived.

Two rounds of negotiations have resulted in, at best, a temporary standing down by both sides, while the fundamental differences on trade and other economic issues remain unresolved.

Anyway, analysts at Credit Suisse say tit-for-tat confrontations will probably become a regular fixture for investors in the future. They see a cycle of disputes and negotiations becoming an annual ritual that harks back to the 1990s, before China became a member of the World Trade Organization (WTO) in December 2001.

The U.S. current account deficit is a function of private sector borrowing, which is relatively stable or may indeed rise a bit, and government borrowing, which is most definitively rising. The U.S. administration’s fiscal policies to date are most likely to increase the trade deficit, not reduce it.


In the meantime, oil is up, in part because the election results in Venezuela for whom the IEA (International Energy Agency) expects their oil production to fall further to about 1 million barrels a day and of course Iran where the sanctions will further impact production, and gold remains weak thanks to the “feel good” China-U.S. trade truce induced sentiment.

Emerging Markets

Unsurprisingly, the dollar is up again and reached a five-month high this morning thanks to the China - U.S. trade war relief while the S&P mini futures rose 0.6 percent in Asian trade.

The continuous strengthening of the dollar while the 10-year U.S. Treasury yield remains above the 3 percent yield mark is really “bad” news for the Emerging Markets’ (EM) currencies and equities, with no quick relief in sight so far.

On Friday, the MSCI Emerging Markets Currency Index closed below its 200-day moving average for the first time in more than a year and the dollar performed its longest rally since 2015, so it’s fairly safe to suppose that more EM currencies’ and equities’ could weaken further, surely over the short time.

As an investor who has or intends to have EM exposure, I’d prefer to be on the sidelines for a while…

Coming Events

Ahead of Wednesday’s release of the “Minutes” of the May’s 1-2 Federal Reserve meeting, Philadelphia Fed President Patrick Harker, Atlanta Fed President Raphael Bostic and Minneapolis Fed President Neel Kashkari all speak today.

The expectations remain that the Fed will continue to tighten policy at a slow and steady pace of a quarter point a quarter and that liquidity supply will match liquidity demand with a gradual scaling back of bond purchases.

Italian elections and the euro

Meanwhile in Italy, there is finally a new government and the Financial Times informs that a little-known professor (54 years old) probably could be the new prime minister of Italy’s nascent populist government.

Giuseppe Conte, a little-known 54-year-old professor who specializes in public administration law and has hardly any political experience, has emerged as the frontrunner to be prime minister for Italy’s nascent populist government and amid a blunt warning from the French Minister of Finance who said yesterday that the new Italian government needed to respect the European Union budget rules, or the euro would be in jeopardy.

For investors, this is extremely important because over the coming days we’ll get more details about the spending programs of the new government and “how” they think to finance all that.

Watch out, yes, Italy, which is the most indebted nation of the Euro area, has the “real” potential of creating a new euro crisis.

Let’s hope it doesn’t come that far.

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

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Now, will any deal reduce the U.S. trade deficit overall? I must admit that I have serious doubts.
china, trade, investors, deficit
Monday, 21 May 2018 12:23 PM
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