Carrot and stick
Today's news headlines:
- ‘Tory talk of no-deal Brexit costs jobs, warns industry’. Conservative leadership challengers campaigning for a no-deal Brexit are costing jobs and contributing to a slowdown in export orders. The possibility of a UK manufacturing recession in the second half of the year is growing as EU companies are less willing to take risks in the UK. (Financial Times)
- ‘Reeling from tariff threat, Mexico begins immigration talks in Washington’. A senior Mexican delegation will be pushed to do more to hold back Central American migrants to avoid increased US tariffs. Illegal immigration across the US-Mexico border is at a decade high this year, and Trump’s aggressive trade diplomacy with Mexico and China has scared investors away from riskier global assets. (Reuters)
Only last week, President Trump surprised markets by opening another tariff dispute with a fellow G20 nation, issuing an ultimatum to Mexico to cease illegal immigration into the US or risk escalating tariffs starting in two weeks. Just as pundits have begun parsing the impact of this move for both the US and Mexican economies, Trump tweeted another provocative statement about India. Next week the US administration is changing the nation’s status from Developing Market and thereby ending preferential, duty-free trade on $6.3bn of Indian goods. It isn’t clear if this is the same brand of dispute as with China, the US having previously used this trade measure of the carrot and stick with allies. We will be watching for further statements to see if this is the start of a new negotiation position or another tariff dispute.
Bottom line: This marks yet another protectionist move with the potential to reduce world trade and therefore, the global pace of growth. By itself, this hasn’t moved the needle but is the latest in a series of actions which has evidently reduced global growth. Safe-havens, like the US Dollar, will be the draw despite already high asset valuations.
China blame game
The Chinese government is willing to work with the US to end the trade war but won’t be pressured into concessions as it blames Trump’s administration for the breakdown in talks. Beijing released a white paper on Sunday stating the escalation of tensions had not ‘made America great again’—a clear taunt based on Trump’s 2016 campaign slogan. It argues that serious harm has been done to the US economy, including increasing production costs, damaging growth, and creating barriers to exports to China. Markets had expected a deal to be finalised in early May as the S&P 500 reached record highs; however, since the souring of relations the same index has retracted around 6.5%. China maintains that a deal can only be achieved when the US removes all additional tariffs and comes to the table from a position that would be mutually beneficial for the two nations.
Bottom line: It’s looking less likely that a deal will be reached in the near-term, a view reinforced by the pullback in major stock indexes and US Treasury yields. China may even try and stretch the trade war out until after the 2020 elections, hoping to have someone more reasonable at the negotiating table.
The trade-weighted Dollar rebounded off of a new YTD highs on Friday, which is also the high since the mid-December equity sell-off. On the other hand, the Pound is still touching new lows, but the journey lower is nearly imperceptible at this stage. After a week of virtually no data points, keep an eye out for today’s Purchasing Managers’ Index (PMI) data for the EU, US, and UK.
The Euro has rebounded from last week’s modest sell-off but seems confined to an even smaller range. Since neither Sterling nor the common currency have made waves in the past week, the pair is trading in a very narrow band. The data-rich week ahead may change that.
Since beginning a downward trend in early January, EUR/USD has been on a path lower. Most recently, any upward progress has been foiled by the descending 50-day moving average. The escalating political tension is only adding further downward pressure on the pair.