Author: Brett F. Ewing, Chief Market Strategist / S. Lance Mitchell, Research Director | Date: 06 August 2018
The market got welcome news recently as reports leaked that China and the U.S. are back at the negotiating table after weeks of apparent silence. The friendlier rhetoric between the U.S. and Europe must have put China on notice and it all but killed the narrative of the two working together to put pressure on the U.S.
On the U.S. side, one issue with everyone knowing tariffs and rhetoric are negotiating tactics is the fact that everyone realizes the will to leave them on is only as strong as the political strength the administration holds. We worry that the window to yield strength from the Trump side is narrow and real agreements need to be getting struck soon.
The China issue is much more complex than Europe as the Chinese state-owned enterprise model makes us wonder just how far President Xi will be willing to go in reducing the joint venture concerns U.S. companies have?
State-owned enterprises line Chinese politicians’ pockets with cash and that’s where much of China’s shadow debt is hidden to stay out of official numbers. The political will to keep this structure in place – or at least to not have any major change – may push China to the negotiating table to offer concessions, as this is much more important to them than tariffs.
The question will be whether Trump will accept reduced tariffs and a gradual change in the joint-venture rules in China for a PR win or if he will push for more real change that potentially President Xi cannot immediately give.
Our main worry would be that these issues are so complex that even if one knew the outcome, it would be almost impossible to know the ripple effects across the globe and how markets would perceive them.
However, despite the recent ramp up in trade war rhetoric, we believe international markets bottomed in late June. Also, we are seeing even more positive developments from the debt side which bottomed even before that and we always put more weight behind price movements than politician speak.
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