Spicy Kim-Xi

Submitted by Rabobank's Michael Every

US-China trade talks wrapped up with a flurry of announcements and Tweets that one needs to stitch together to try to understand what is going on. My conclusion is that things are about to get very spicy if you consider the full range of ingredients going into this dish and not just the meat.

Both sides agreed that the talks had been substantive and progress had been made, but US Trade Representative Lighthizer made clear the “thorniest” issues are still technology and intellectual property. Lighthizer and Mnu-China will now be going to Beijing together soon to continue the talks. President Trump has been stated as being deeply involved from backstage in these negotiations too, and he weighed in several times yesterday with comments that are important to understand. To reporters, he stated: “This isn’t going to be a small deal with China. This is either going to be a very big deal, or it’s going to be a deal that we’ll just postpone for a little while.” Translating that into English, it seems to mean that a Mnu-China soy and LNG deal is not the table, and Trump will keep pushing for the big Lighthizer reforms. Moreover, consider these following Trump Tweets:

China’s top trade negotiators are in the U.S. meeting with our representatives. Meetings are going well with good intent and spirit on both sides. China does not want an increase in Tariffs and feels they will do much better if they make a deal. They are correct. I will be meeting with their top leaders and representatives today in the Oval Office. No final deal will be made until my friend President Xi, and I, meet in the near future to discuss and agree on some of the long standing and more difficult points. Very comprehensive transaction. China’s representatives and I are trying to do a complete deal, leaving NOTHING unresolved on the table. All of the many problems are being discussed and will be hopefully resolved. Tariffs on China increase to 25% on March 1st, so all working hard to complete by that date!

He is keeping the negotiating pressure on. And a Trump-Xi summit looms. Yet Trump then immediately upped the ante on Xi:

Looking for China to open their Markets not only to Financial Services, which they are now doing, but also to our Manufacturing, Farmers and other U.S. businesses and industries. Without this a deal would be unacceptable!

Now things get even more interesting. Trump meets Xi in China immediately after a second summit with North Korea’s “rocket man” Kim Jong Un: that makes for truly spicy Kim-Xi! What does the US want? A real China trade deal and Kim in their camp as a threat to China. What does China want? A superficial trade deal and Kim back in their camp. What does Kim want? Economic aid, to be seen as a nuclear power, and to be in everyone’s good books so he can get Chinese trade and still get to take selfies with the public elsewhere. How is the US going to react on trade if Kim insists on not disarming, or on the US leaving South Korea? How will China react on trade if Kim decides he wants a Miami condo more than one in Hainan? And how will Trump react if Xi won’t give him his deal, and Xi react if Trump won’t bend? There are so many possible permutations. We could see the US, China, and North Korea all friends – or something else.

On that front, we also need to consider other Trump Tweets. They are relevant, I promise.

The Intelligence people seem to be extremely passive and naive when it comes to the dangers of Iran. They are wrong! When I became President Iran was making trouble all over the Middle East, and beyond. Since ending the terrible Iran Nuclear Deal, they are MUCH different, but a source of potential danger and conflict. They are testing Rockets (last week) and more, and are coming very close to the edge. Their economy is now crashing, which is the only thing holding them back. Be careful of Iran. Perhaps Intelligence should go back to school!

That is a very clear endorsement of a very hard line on geopolitics and the use of the economy and markets as weapons (i.e., sanctions) that “hold Iran back.” Furthermore, Trump added:

When I became President, ISIS was out of control in Syria & running rampant. Since then tremendous progress made, especially over last 5 weeks. Caliphate will soon be destroyed, unthinkable two years ago. Negotiating are proceeding well in Afghanistan after 18 years of fighting. Fighting continues but the people of Afghanistan want peace in this never ending war. We will soon see if talks will be successful? North Korea relationship is best it has ever been with U.S. No testing, getting remains, hostages returned. Decent chance of Denuclearization. Time will tell what will happen with North Korea, but at the end of the previous administration, relationship was horrendous and very bad things were about to happen. Now a whole different story. I look forward to seeing Kim Jong Un shortly. Progress being made-big difference!

Is he expecting success with Kim? Or is he trying to show that he at least tried? So many ingredients here, and so much chili! And there’s more. Against that backdrop we have the frankly jaw-dropping news that Germany is decided it will NOT be using the US F-35 fighter jet as the replacement for its Tornado air-fleet. Let me spell out what that means: 1) Germany won’t be buying US planes and so not only doesn’t it spend enough on NATO now, but even if it does ever spend, that cash won’t flow to the US to rebalance trade between the two; and 2) Only the F-35 is compatible with the US tactical nuclear deterrent, so Germany won’t be under that NATO shield, unless the US signs off on a Eurofighter alternative – why should it, considering the Eurofighter is seen as out of date? Indeed, given EU-US tensions over geopolitics, e.g., EU insistence on trying to circumvent the US sanctions on Iran Trump just said are so important, does anyone see this ending well for US-EU trade relations? Because I don’t. And circling back, what if the US does strike a China trade deal, and only US firms get the benefits, not EU? That said, yesterday also saw news that the EU is considering a ban on Huawei for 5G too, so it also seems to be hedging its bets.

Yet overall, with no US F-35 exports ahead I am not sure if Germany realises what it is doing (it seems blithely unaware of a whole host of problems it is creating for everyone, after all); suffice to say that this issue could create as much market fire as the spiciest chili.

Day ahead                    

For those who want to look at data instead of all this today has Caixin and Markit PMIs, Eurozone CPI, and US payrolls.

But does that even matter? The Fed has already shown us this week that it doesn’t intend to do anything except cut, eventually, so why get antsy about a number that will underline that the labour market is on fire, albeit without serious wage inflation. (For those who care, the consensus is 165K, but like I said ** yawn**.) Then we have the US ISM survey too. For which the same holds true. It will only matter if it’s weaker than consensus.

In short, what was once a juicy market steak has been cooked to death by the Fed, making it unpalatable; and it is anyway now smothered in a layer of Kim-Xi.