Limited Relief

Now that the dust has settled on the US-China limited ‘Phase 1’ deal formulated at the end of last week markets can look to other events/data this week.  Prominent among these are Brexit discussions, which look as though they are carrying over to today as discussions towards a final deal intensify (more on this in another post).  However, casting a shadow over markets today is the news that China has threatened retaliation against the US after the House of Representatives passed a bill on reviewing the preferential treatment for HK.

Stepping back, regarding the trade deal it was probably the easiest one on the table from China’s perspective.  The US agreed to hold back on raising tariffs on $250bn of Chinese goods while China agreed to increase agricultural purchases and give limited access to its financial markets.

However, it was no “love fest”.  It is very narrowly focused, doesn’t role back previous tariffs, does little to change the growth narrative, nor does it deal with the tougher structural issues and enforcement mechanisms etc.  It is also vague on the Chinese currency, renminbi. In any case China had already highlighted and strongly hinted at increased agricultural purchases over recent weeks

Yes, there was some vague commitment to address intellectual property (IP) issues, something that hawks in the US administration have been pushing for but this is akin to closing the barn door after the horse has bolted. China has already tightened up IP regulations at home and in fact is now keen to protect its own IP so it has a big incentive to tighten up IP rules.

The US administration was probably more than happy to avoid another increase in tariffs on China given the desire not to fuel more market instability, growing focus on elections next year and to show some form of progress to take the attention away from the impeachment inquiries.  Implementation of the next tariffs round on December 15 is unclear but given the above it could be delayed or scrapped.  That would be more substantial progress.

Over the short term markets will be relieved that tensions on trade are not worsening though the passage of the bill on Hong Kong by the US House of Representatives threatens to increase tensions on another front.  The bottom line is that there is some breathing space on the trade front, with the President Trump stating that it may take up to five weeks to complete the deal.  Some form of signing may take place at the Apec Summit in Chile in mid-November.

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