2 out of 3 ain't bad
Heading into the final quarter of the year, three issues were top of mind for our international equity team: Would U.S.-China trade tensions ease? Could a hard Brexit be avoided? And could the Trump administration and the European Union (EU) see their way through their differences and avoid an escalating trade war of their own? It would appear at this point that the answers are yes, yes and too soon to say.
- U.S.-China The rhetoric coming out of Washington and Beijing in recent days suggests the two sides will complete their previously announced mini trade deal calling on China to buy more agricultural products in exchange for the U.S. putting off tariffs that were slated to start last week. We think both sides will sign off on a final deal by their self-imposed mid-November deadline as China needs the ag products—particularly pork—and the White House needs a “win’’ amid the impeachment inquiry sideshow. The real test in this détente could come in mid-December, when a new round of tariffs on Chinese imports to the U.S. are scheduled to take effect. We’re thinking those will be lifted, too, but that may be all the two countries publically agree to in the foreseeable future as Trump focuses on re-election, arguing that he needs to “finish the job” with China, and China sit backs to see which way the political winds blow as the 2020 election nears.
- Brexit While the final outcome on Brexit has yet to be determined, this week’s vote by Parliament giving tentative approval to Prime Minister Boris Johnson’s withdrawal agreement makes it almost certain the U.K. won’t exit the EU without some sort of deal in place. This drama, of course, will continue to play out as Parliament subsequently shot down Johnson’s companion request to fast-track the deal in order to meet the EU’s Oct. 31 deadline for withdrawal. All sides appear willing to push back a final exit date to allow for appropriate review and preparation as the i’s get dotted and the t’s get crossed. But to prevent the process from dragging on too long, Johnson today called for a Dec. 12 snap election, which polls suggest he may win rather easily, further strengthening his hand. The bottom line for the markets: a favorable end is in sight, which should provide much-needed relief not only to a still struggling U.K. economy but to a market fatigued by this seemingly never-ending saga.
- U.S.-EU This trade war has been the warm-up act for the U.S.-China showdown, but it is significant, too, as the EU is the fourth-largest trading partner with the U.S. The U.S. kicked it off last year, imposing steel and aluminum tariffs on EU countries and others, with the EU retaliating with duties on a range of U.S. goods from motorcycles to bourbon. This month, the U.S. imposed another $7.5 billion of tariffs on a hodge-podge of products, backed by a World Trade Organization ruling that the EU was unfairly subsidizing Airbus. The slowdown in global trade spawned by these trade wars have battered the eurozone, with mainstay Germany experiencing a manufacturing recession that is threatening to spill over to its entire economy. Where things go from here could be determined in coming weeks, as the White House is floating the idea of new talks before schedule tariffs on European automotive imports kick in next month. Failing that, this trade-war sideshow could soon take center stage.
Less bad is good
Where does this leave us? We’re more hopeful than we were just a few weeks ago, when we thought odds of a hard Brexit might be as high as 50-50, with the outlook on the U.S.-China front not much better. Now, however, the news on both fronts is less bad, and that’s good. If the U.S. and EU make nice and avoid the auto tariffs, all the better. Still, our view on European and U.K. equity market remains cautious for now. Watch for an update as the pending aforementioned developments unfold.