Are We Turning the Corner on Global Trade Wars?
There were a few very prominent, positive developments on the trade war front this past week, but is it enough to systemically change the course of the global economic standoff back towards the cooperative growth of the past? Throughout the past week, there was a building din of unconfirmed reports that US President Donald Trump would delay the decision on whether or not to apply tariffs on auto and auto part imports at the May 18th initial deadline to the Section 232 report the administration ordered to investigate the competitive field. As the headlines channeled unnamed officials trying to assuage investor fear, the market slowly stabilized and started a tepid climb. Full confidence was withheld however as participants were still shell-shocked from the sudden reversal on US-Chinese relations the week before. Rather than wait for a weekend reveal to potentially leverage news cycle response and a Monday market swell, the President confirmed Friday morning through his press secretary that he would delay the decision ‘up to 180 days’ as negotiations continued. Technically, this is only a delay, but previous stretches of peace have been occasion for speculative interests to rally in the past. Interestingly, the market responded to the official news with a weighty skepticism, squandering a recovery developing through the second half of the week.
There was another chip to play to potentially rouse the bulls to life. The stalled progress on the North American economic pact – replacing the long-standing NAFTA accord with Trump’s centerpiece USMCA – could find a jump should the White House drop the steel and aluminum tariff quotas on Canadian and Mexican partners. That would lower Congress’s reservations towards the deal and perhaps secure a clear ‘win’ in the course of a global trade war. The administration issued another confirmation Friday that it had done just that - removed the metals tariffs on those key trade partners – and Trump issued remarks shortly thereafter calling on the Legislature to pass the stalled deal. Yet again, the news was met with an apathetic response. Averting a dramatic escalation of ongoing trade wars (autos) and making strategic moves to realize previously stated plans (USMCA metals) carries limited sway when compared with the full stride of the US-China trade war.
A week after the US ramped up tariffs on $200 billion in China’s goods from 10 to 25 percent and China retaliated on $60 billion in imported US goods (also up to 25 percent), we have seen strong language from both sides and reports that efforts to restart talks have thus far failed. This standoff is not a practice in academic curiosity but an earnest throttling of economic activity. We have seen the consequences of the higher costs and restrictions bleed through in the wide run of Chinese indicators while the US sentiment surveys and inflation reports show a more subtle, but still nefarious, influence. There are still approximately three weeks for the two sides to make headway according to the President’s warnings before the US expands it imports tax list to include all of China’s goods (they estimate another $325 billion). Speculative appetites may be such that they simply won’t run simply because they have a little longer leash. However, my concern is that we are already seeing the fruits of full expectation that this trade war will be resolved. If all of these artificial encumbrances are removed and the market still fails to gain altitude, the recognition of a decade-long cycle end may be difficult to miss.
Is the Second Quarter Going to Cap Recovery Hopes
Since the United States issued its better-than-expected first quarter GDP update, there has been a notable shift in the outlook for global economic activity. Before that milestone, there were mounting concerns that the cumulative effects of trade wars, central banks easing off the accelerator on monetary policy and feet dragging on fiscal policy were converging with natural late-cycle economic struggles. What the official quarterly growth update from the world’s largest economy was less of a definitive turn in conditions and more of a boost to sheer sentiment. Mere collective bias can dramatically change the way market’s move in terms of direction and tempo by amplifying the ‘favorable’ developments and tempering the fallout from the ‘adverse’. This prejudice of systemic speculative appetite will be put to the test moving forward on a number of key issues. The resurgence of the US-China trade war turns the focus onto the snowballing pain absorbed as long as the fight continues and any sign of intent for central bank support moving forward can be offset by a practical appreciation as to what the stretched monetary policy authorities can even hope to deploy. There real traction on sentiment however will always take more readily from unambiguous data. While sentiment surveys are still vitally important to translating the abstract issues into intent for investors, consumers and businesses; there is more mileage in price action from clear growth data points.
On this point, we will be processing a number of updates through the forthcoming week that will cut right to the heart of the growth question. The most comprehensive ‘backwards’ update will come in the form of the advanced PMIs (Purchasing Manager Indexes) for May. We are due updates on manufacturing, service sector and composite activity readings from Japan, the Eurozone and the United States among other countries. As we’ve discussed before, the correlation between these proprietary – and timely – economic measures and the official – and slow – quarterly GDP figures is remarkably high. A strong showing in this run of data could beat back growing concern, but it will struggle to topple an entrenched bias. On the other hand, a poor showing could shake loose the hold outs in the financial system like the S&P 500 and other US equity indices to compound fears. There is plenty of complementary growth data that can subtly change course but much of it is dated (like the Japanese 1Q GDP update) or too narrow in focus (such as the US durable goods). If you are looking for a better line to project growth, keep an eye on the OECD’s updated growth forecast. As far as supranational group economic projections go, this group tends to hit close to the mark.
The EU Parliamentary Election’s Influence Over Euro’s and Pound’s Future
Perhaps one of the most influential events on the docket for the coming week is the European Parliamentary elections starting Thursday the 23rd and running through Sunday. As far as systemic but abstract fundamental themes go, there is enormous economic and financial influence from the pursuit of nationalistic interests. Frustrated by slower measures of growth these past years, global citizens and politicians have taken to escalating the portion of blame to be assigned to strategic economic and diplomatic relationships with other countries and regions. Never mind that the leverage from global growth over the past decades would have been far less expansive if it had been just the collective efforts of domestic agendas. In Europe, the threat of populist interests could turn into a existential risk.
The European Union and Euro-zone (the narrower monetary collective) are held together by the belief that economic might – and no small measure of militaristic security – is dependent on their cooperation. That said, there has been an unmistakable rise in nationalist fervor across Europe with previously unrepresented parties gaining significant presence in governments. Perhaps the most prominent example of this political shift comes from Italy which is ruled by a coalition government that ran on a platform that was not shy about its anti-EU views. Alone, Italy represents a threat to stability for the EU and the shared Euro. Deeper rifts may develop as representation in the EU Parliament is sorted if we see a universal foothold in anti-Union sentiment. The stronger the showing from anti-EU/Euro representation is, the more fragile the future for a collective Euro. If there were an overwhelming threat to the economic alliance to draw from the results, it would not be a stretch to expect EURUSD to fall to parity through 2019.
Another perspective to watch in the vote is the UK’s position. They have opted to participate in the election even though they intend to withdrawal from the EU as a requirement to earn an extension on their Brexit proceedings. The rhetoric from the British government has born little-to-no fruit with the allowance of additional time, and now the citizenry is likely to punish the principal political players for their inability to move forward and compound economic loss along the way. According to recent opinion polls, the Labour party was still in the lead for intended votes but it gave up a significant portion of its base to the new Brexit party. In the meantime, the Conservatives that are currently leading government are expected to drop back to fifth in the standings losing the bulk of their support to the aforementioned new entrant. This vote will also be used as strategy to force a vote on the Withdrawal Agreement and the timeline for the Prime Minister, Theresa May, stepping down. The Sterling does not need more reason to succumb to pressure.