The Xi-Trump trade truce may not end in a peace treaty, and markets should prepare accordingly
- Neal Kimberley says investors can adjust short-term plans, but the pending US tariff hike has only been delayed for 90 days
- And, even if the trade war is resolved for good, investors may have to prepare for more Fed interest rate rises than expected
The White House statement noted that “China has agreed to start purchasing agricultural product from our farmers immediately”. Markets might therefore rationally expect an uptick in the price of US soybeans. The onset of tariffs and counter-tariffs have seen Chinese purchases in 2017 of US$12 billion of US soybeans dwindle to almost nothing this year, resulting in lower US soybean prices.
Other potential market implications of the Xi-Trump meeting may be more contestable. In the currency space, it could be argued that no further worsening in trade tensions could lend itself to a greater degree of risk appetite as opposed to risk aversion, although diminishing liquidity conditions going into the end of the year may delay such a development until January.
Minutes of the Fed’s November meeting, published last Thursday, did show that policymakers thought another US rate hike was “likely to be warranted fairly soon”. Markets expect a hike this month. But the Fed also said US “monetary policy was not on a preset course”, alluding to, among other factors, “risks in the global outlook”.
Writing on November 28, Eleanor Olcott, a China policy strategist at investment research firm TS Lombard, argued that the trade war has “morphed into a broader economic confrontation which is set to be long and ugly”, adding that, for example, “the [Trump] administration is capitalising on grievances against [intellectual property] theft to push through moves to block China from acquiring cutting-edge expertise”.
Such a viewpoint only serves to bring the 90-day time frame for agreement into even sharper focus. Even assuming that the will to negotiate on both sides is there, markets could still conclude that the allotted timescale for such broad negotiations is too short to guarantee an equitable conclusion.
Markets can take a variety of short-term directions as a consequence of Saturday’s meeting but shouldn’t get overexcited. It is going to be a tall order for Beijing and Washington to resolve all their trade differences in just 90 days. Ceasefires don’t always lead to peace treaties.
Neal Kimberley is a commentator on macroeconomics and financial markets