In a somewhat gloomy post, Bloomberg warned this week against optimism on a U.S.-China trade deal this month. It further notes that the “next round of U.S. tariff hikes on China is little more than two weeks away,” though equity and foreign-exchange markets aren’t signaling much obvious concern.
Possible increased trade tension “may set things off to a rocky start in the fourth quarter, a period when thinning liquidity is perceived to increase the risk of volatility,” Bloomberg said. For their part, strategists at some of Wall Street’s biggest banks –including Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc. – "are warning against expectations of any truce in the upcoming round of U.S.-China trade talks.”
“We have more conviction that, without a circuit breaker, escalation continues over the medium term, meaning any pause is fleeting,” Morgan Stanley strategists including Michael Zezas wrote in Monday’s note to clients. “Investors should price in all announced actions (i.e., tariffs on both Oct. 15 and Dec. 15) even if further delays or pauses are announced.”
Amid news about administration deliberations on curbs on U.S. investments in Chinese companies that hit stocks Friday, S&P 500 futures and the yuan both rose in Asian trading Monday. “That’s after China confirmed that its top trade negotiator, Vice Premier Liu He, is still heading to the U.S. for negotiations after national holidays end Oct. 7,” Bloomberg said.
Bloomberg also noted that the Morgan Stanley team highlighted that “rounds of top-negotiator talks lately have been followed by tariff escalation, not by an easing in tensions.”
Indeed, President Donald Trump on Aug. 1 announced a new round of tariff hikes shortly after the principal U.S. negotiators returned from talks in Shanghai. And that triggered the worst month for global stocks since May – when investors were also handed an escalation in tariffs. In currencies, the yuan slid through 7 per dollar, for a time spooking investors across emerging markets.
September saw both stocks and exchange rates settle, as the U.S. and China announced goodwill gestures that took tensions down somewhat.
However, the next round of headlines may not be so cheery, the report said. “While trade talks so far have been noted as constructive and the delay of some tariffs has led to some market optimism, we do not expect the Trump administration to reach a deal assuming continued strong U.S. economic and financial conditions,” Cesar Rojas, an economist at Citigroup, wrote last week.
Rojas flagged the fact that, in addition to the upcoming tariff hikes, the U.S. Treasury’s semiannual foreign-exchange report is due in October. The department already has labeled China as a currency manipulator, so the focus now is whether the Commerce Department has any related announcement on treating the exchange rate as amounting to a subsidy, clearing the way for countervailing duties, according to Rojas.
One new element going into the upcoming negotiations is President Trump’s impeachment fight in the House of Representatives. JPMorgan analysts noted that those tensions could have a bearing:
The president “may experience an epiphany that inclines him to accept a weak offer from mainland China to end the trade war,” John Normand, JPMorgan’s head of cross-asset strategy, wrote on Friday. “But the adverse scenario is also credible: realizing President Trump’s vulnerability, China may slow-walk negotiations and even court another tariff hike, on the expectation that another year of mutual stress might raise the odds that Trump loses the 2020 elections.”
JPMorgan’s base case is for talks to drag into next year. And the bank sees the yuan sliding by year-end to 7.35 per dollar, the weakest since 2007.
Bank of America Merrill Lynch is even more bearish on China’s currency, seeing it tumbling to 7.50. “Cautious optimism is building that a narrow deal can be achieved” in the upcoming talks, Claudio Piron, a Bank of America strategist in Singapore, wrote recently. But even if there is a truce, the yuan may still slide, he argued--with China likely to ease monetary policy and try to offset existing tariffs through currency depreciation.
Goldman isn’t quite so bearish on the yuan, keeping its near-term target at 7.20, compared with 7.1375 in Shanghai trading Monday.
In addition, Goldman’s economists offer some sobering broader context for major American trade disputes over history.
“In most instances, tariffs remained in place for several years, with a median duration of three-to-four years in our sample of major postwar disputes,” analysts including Alec Phillips wrote last Friday. “The more complicated conflicts saw periodic detentes that in some cases remain unresolved years or decades later.”
So, we will see. Clearly, uncertainty over many economic, financial and trade policy issues continues to grow, as well as the weather, the national political situation and trade policy, among others. As a result, producers are well advised to watch closely, including especially the national fights over trade policy as the pre-election runup continues, Washington Insider believes.
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