Calling his bluff

The ongoing Trump impeachment saga is negative for so many reasons. It’s almost like an absurd piece of theatre where the Democrats pantomime moral superiority while losing ground with the common man and the prospect of a US-China trade resolution becomes yet another mirage in the economic desert that is the global economy. Just this weekend, the legal firm representing the whistle-blower said they now represent more persons who can substantiate the President’s various political transgressions. The substance of these disclosures will have to be Teflon, because Donald Trump’s sway amongst his constituency is based on him being an outsider of the establishment, with anything that displeases him often deemed a conspiracy.

Impeachment hearings and CIA whistle-blowers feed these thought processes, like sharks swallowing licence plates, whole without checking the contents. The earlier Mueller investigation didn’t deliver a shocking sound bite to support impeachment, despite Trump saying 'You can do anything' when you're a star regarding his approach to women, which caused backlash from allies and opponents, he still won the Presidential election. The Democratic field of Presidential candidates will have to manoeuvre these proceedings with extreme subtlety and almost casual disinterest, to avoid wasting their political capital arguing against Trump rather than communicating their message.

For a time, a large part of the Washington establishment seemed to get behind the trade war; when the Democratic candidates were asked who would scrap Chinese tariffs, there weren’t any takers. If you look through all of the waste—prolonged political and economic uncertainty, slowing of trade and investment, overwhelming costs accruing to the average consumer—there are a few talking points which have some real substance; trade enforcement is top of the list. After all, it seems logical that for an agreement to be binding, there needs to be a way to hold each party of the agreement to account. The Chinese argue that these sorts of measures would encroach upon their sovereignty as if every trade deal wasn’t a direct trade-off between state control and economic benefit. As western politicians use strawman arguments to cover up their real motivations, so too do the Chinese. The average Chinese citizen has gone from pro-western towards nationalist, particularly on this trade issue, where Trump casts trade as a zero-sum game in which America’s win is China’s loss. Now that Trump is heading towards impeachment, the Chinese negotiating side has the opportunity to run out the clock on his Presidency. ‘Vice Premier Liu He who will lead the Chinese contingent in the upcoming high-level talks, said his offer won’t include commitments on reforming Chinese industrial policy or government subsidies.’ (Bloomberg)

Bottom line: At this stage, there’s likely to be a Chinese trade deal which doesn’t accomplish any of the substantive, long-term goals, but will provide a nice sound bite for the Trump 2020 campaign. It would be better for the next President to pick up the mantle in 2020 than to drop the issues after so much economic unrest and uncertainty. It may seem absurd that Trump might run again and win, but he won the first time, and he arguably has a lot more credibility now than he has ever had. 

The week ahead

GBP

Last week proved to be a volatile one for the Pound as the trade-weighted Index closed the week below the 100-daily moving average. The currency climbed above this level as Johnson’s new Brexit plan was released but failed to maintain gains following negative comments from EU leaders. The week ahead will likely consist of market-moving headlines regarding key players involved in the Brexit negotiation process.

  • On Tuesday, multiple Monetary Policy Committee (MPC) members will speak throughout the day, although comments regarding a clear monetary policy direction are uncertain given the binary Brexit scenarios.
  • Thursday morning will bring month-on-month GDP growth data, which is expected to be stagnant at 0% as well as month-on-month Manufacturing Production. Manufacturing has been a crucial data point throughout developed economies as the sector has taken the biggest hit amid the global slowdown. Expectations are for weak growth in the sector, coming in at 0.1%.

USD

The trade-weighted Dollar Index fell from two-year highs at the beginning of last week following fears that the global economic slowdown is hitting the US manufacturing sector. Following the weak manufacturing release, expectations were low for Friday’s labour market data which also came in below expectations. However, the Greenback stayed above key moving averages and opened Monday’s session strong.

  • On Tuesday afternoon, September’s US PPI, a measure of inflation, is expected to print at 0.1%, in line with the previous monthly reading. While not the most significant inflation measure, it still provides a useful insight into US price growth which remains muted in the current climate.
  • Meeting minutes from the Federal Open Market Committee will be released on Wednesday evening and will provide details of the current view of the Federal Reserve regarding monetary policy. While it’s likely that not much will be given away, investors will analyse the rhetoric of members for clues on the future path of interest rates.
  • The more insightful inflation measure of CPI will be out on Thursday afternoon, and expectations follow Tuesday’s PPI inflation reading. Month-on-month growth of 0.1% is expected, and a reading lower than this is likely to prompt increased expectations of future monetary easing.

EUR

The Euro Index rebounded off multi-year lows last week, although gains may be limited to the short-term as the European economic outlook remains considerably bleak. On Wednesday, the Eurogroup meetings will take place in Brussels as Finance Ministers from Euro-area nations gather together with the European Central Bank President for discussions on various financial issues. Officials will be speaking to reporters throughout the day, with a formal statement likely to be released after the meetings.

  • On Tuesday morning, German Industrial Production numbers will be released, and expectations are for negative growth at -0.2%, an improvement from last month’s -0.6%.
  • On Thursday, French and Italian month-on-month Industrial Production figures will reach markets. Both readings are expected to show 0.2% growth, a significant improvement from Italy’s -0.7% last month, and a slight down-tick for France, which recorded 0.3% growth last month.