16.12.2019 – Special Report. Hooray – the open trade war is averted. Washington and Beijing announced on Friday that there is a deal for Phase I. The announcement calmed the stock market down for now. But once again important details remain unclear. Which increases the potential for setbacks.
This brings Phase I
Particularly important for China: The USA has committed itself to partially withdraw already imposed tariffs, said China’s Deputy Trade Minister Wang Shouwen. Washington wants to levy only 7.5 percent on most products that were previously subject to a rate of 15 percent. According to press reports, China’s President Xi Jinping had demanded such a step from Trump in order to save face.
But: For some time now, punitive tariffs of 25 percent have been imposed on imports from China amounting to around 250 billion US dollars. But it remains that way.
The most important fact is that the US has cancelled the new tariffs on goods worth around 150 billion US dollars that had actually been planned since yesterday. Almost all consumer goods – such as computers, video game consoles and iPhones manufactured in China – would have been affected for the first time by the new US punitive tariffs. The voters would certainly have grumbled during the Christmas shopping. This would have meant that additional customs duties would have been levied on almost all imports from China worth around 500 billion US dollars per year.
China wants to buy US agricultural goods
For its part, the People’s Republic had threatened to introduce additional taxes on wheat, maize, aircraft and other imports from the USA. That is now a thing of the past. In return, the Middle Kingdom also agreed to purchase agricultural, industrial and energy products from the United States on a large scale. But which and to what extent?
The partial agreement also includes chapters on intellectual property, technology transfer, agricultural products and exchange rates, according to Vice Secretary of Commerce Wang. Does China want to stop sinking the yuan?
These are the shortcomings of Phase I
Goldman Sachs complained that although the signals were pointing in the right direction with the reduction in tariffs, the reduction in punitive tariffs now agreed was only half what the investment bank had expected. In addition, the impression once again suggests itself that technical and legal details are still not fixed.
In fact, a text on Phase 1 has not been published – it does not even exist yet. US Trade Representative Robert Lighthizer told journalists in Washington that the deal would be signed at ministerial level in early January. In addition, it is not known whether and how punitive mechanisms should work if China tricks once again.
The question also arises as to how much China can and will buy agro-products. Trump expects China to import goods worth 50 billion dollars by 2020. Lighthizer also said China had promised to buy $40 billion worth of goods in the first year, and is working hard to make it $50 billion the following year. That would loosely be a four- or five-fold increase. But the Chinese Deputy Minister of Economics, Wang Shouwen, did not give a concrete figure. That’s why the analysts at Nomura already doubted whether the Americans would reach the magnitude they expected. In fact, Chinese purchases from American farmers even at a high only amounted to 25 billion dollars, as the chart of the International Food Policy Research Institute (IFPRI) impressively shows.
These are the odds
This leads us to short and medium-term trading scenarios for traders and investors. If we leave out all other factors – such as a meltdown in the US repo market, a crash of debt states in the eurozone or a global recession, plus the Federal Reserve’s interest rate policy – then the trade dispute will probably turn into a fairly clear course.
All in all, this looks like a lean deal. But at least it’s one thing that delights the cops on the stock market. So the bull market on Wall Street will probably stay with us for a while. Especially since this is Trump’s second trading success in a short space of time: he had just persuaded the Democrats in the US House of Representatives to approve the reformed USMCA trade agreement between the US, Mexico and Canada. Chinese indices also tend to stay on the long side because of better export prospects.
The same applies to the yuan. Since US punitive tariffs have been abolished and China has made a half-hearted commitment, there are few reasons for Beijing to manipulate the Chinese currency downwards and annoy the domestic middle class.
When trading CFDs, you should also keep an eye on the futures on pork bellies and soybeans. Regardless of whether the 50 billion will be reached or not, there is a lot to be said for buying from China. Because swine fever is rampant, the high prices in China are a factor for increased imports of meat, and if China boosts offspring, demand for soy is likely to pick up. If China also buys energy in the US, this could argue for an investment in US shale drilling.
Pump and Dump in Phase I
The scenario just described becomes obsolete, of course, if the deal still breaks. But the stock market must not collapse before the election – this would cause problems for the pension funds and thus annoy the voters. The same stalling tactics as in the past months are therefore called for. So keep expecting success stories from Washington, especially after the stock market has reset. But interrupted by critical trump tweets when Wall Street is overflowing and/or the Chinese don’t track as intended. With the continued existence of punitive tariffs, the USA will retain a means of exerting pressure – and the USA could reactivate the tariffs that have been set aside. This pattern, nicely compiled by ZeroHedge, you have been able to observe very well recently.
Difficult Phase II
Trump now also wants to negotiate Phase II immediately. We doubt it will be anything like that in 2020. Because this is about the actual core of the trade war: the Chinese business model of copy and paste – in other words, the theft of intellectual property. The state-imposed or tolerated industrial espionage of Chinese companies abroad will certainly not be stopped by Beijing. The same applies to government contracts that are only awarded to Chinese companies. Xi has so far strictly refused to stop the subsidy programme for the expansion of future key technologies.
It will not be until 2021 that the “candour” will be achieved.
We suspect that only after the presidential election and when half of the Congress members will be new, things will really go smoothly. Since the Democrats are destroying themselves with the Impeachment theatre, the Republicans are likely to gain the majority in Congress. And then Trump, with the backing of Congress, will probably put on the hard bandages against China.
So from November 2020 we could be threatened by a severe bear market on Wall Street and therefore also in the DAX – and a bull market in gold, the usual safe haven. But until then it will be a while. Bernstein-Bank wishes you successful trades and investments – we will keep an eye on the matter for you!
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