What's next? What's next? http://www.federatedinvestors.com/static/images/fed-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\exports-ship-containers-small.jpg July 15 2019 May 14 2019

What's next?

"Trust but verify," an iconic message of the Reagan era, is just as apt today when it comes to the U.S.-China trade war.
Published May 14 2019
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“Trust but verify,” the Russian proverb that became famous when President Reagan used it during the 1980s’ nuclear disarmament talks between Russia and the U.S., is just as relevant today as the U.S.-China trade talks enter their critical final stages. The U.S. wants to know how it can be sure that all of the hard work the two sides have done over the last 18 months will become a reality, with a resolution likely coming down to how the Trump administration can trust that China is going to do what it agrees to do. I wouldn’t be surprised if “Trust but verify” makes it into one of President Trump’s tweets this week.

From China’s perspective, the concerns are twofold. First, China’s leaders are said to feel that the enforcement mechanisms the White House is demanding encroach on their country’s sovereignty and question their integrity, i.e., their ability to keep their word. Secondly, it appears Chinese negotiators aren’t willing to agree to anything if there is no end in sight to U.S. tariffs, a tool the Trump administration has insisted it wants to keep in its toolbox to ensure compliance by China. This is where “trust but verify” comes into play. China is going to have to come up with a mechanism that can provide the U.S. with the comfort that an agreement will be enforceable, both today and into the future. And the White House is going to have to cede ground on tariffs if that level of comfort is achieved.

What do we expect? Our base case still calls for an agreement, possibly around next month’s G-20 meeting. But between now and then, uncertainty and volatility may likely remain high—and possibly increase. It’s all about the June gathering. Presidents Trump and Xi kept talks going after they met back in December at the last G-20 meeting, and it will be up to them to get this agreement across the finish line. Both have strong personalities and fervent bases they must appease, so they will need to find a way to look like winners. This is going to be very tough to achieve, with the markets certain to inflict pain until they get clarity on what’s next. We saw that Monday, when U.S. stocks plunged and China’s renminbi suffered its worst single-day drop since last August.

Indeed, the U.S.-China trade fight remains the one big uncertainty hanging over the global economy and market. It has kept Europe and the U.S. from holding critical trade talks of their own, undermined crucial trade flows throughout Asia and Europe, and worked to counter all the monetary accommodation central banks are pouring into their economies. So the sooner the U.S. and China come to an agreement, the sooner global growth can perk up. While we’ve seen recent green shoots in the macro and earnings data out of Europe—60% of eurozone companies beat sales estimates and 55% beat earnings estimates in the nearly completed reporting season—without a favorable outcome between the U.S. and China, these green shoots may well wilt.

 

Tags Equity . International/Global . Markets/Economy .
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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.

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