Blain's Morning Porridge, submitted by Bill Blain
“We will have an extended meeting next time… ”
That was truly an extraordinary weekend. Trump vs Xi agreed to resume trade negotiations. No more tariffs, but the old ones still in place. Huawei ban to be reconsidered. Trump also met Kim in the DMZ. It was also the end of H1 2019, with stock markets posting their most impressive gains since 1997 even as bonds proved the top returning assets – which should have everyone wondering and worrying how!
I reckon that puts us in a very interesting position for the next 18 months. Trade wars will remain a major distraction and concern – whatever happened in Osaka over the weekend, about the only thing we can confirm is nothing is really fixed! Instead, the dominant factor in coming months could be the US Federal Reserve – and how it is likely to come under increasing pressure from Trump, who is now in full electioneering mode. That puts a whole new complexion on the Game of Markets.
(I am travelling next few days, but I would be fascinated to read any research on how markets perform in the lead up to US elections? I suspect its highly unlikely Trump will countenance any kind of market instability that could damage his prospects ahead of Nov 2020 – therefore expect lots of Fed Bashing as an electoral weapon!)
Let me try to put it all in context. We are posed with far more questions than answers. Its complex:
The renewed trade negotiations between China and US will have little effect on market direction. The news will decrease expectations of an imminent global recession, but it also reduce the pressure on the Fed to cut US rates. Hence it is Market Neutral.
This week’s US Payroll number on Friday is expected to be back in the 150k range, confirming last month was an anomaly and the US is still seeing strong/moderate growth, suggesting little immediate pressure to ease rates.
Both Trump and XI were playing for time - Trump’s demands about opening up China to US agri-goods is simple play for an electoral boost. XI needed the promise of no further tariffs and a Huawei rethink as a sign he’s got concessions. Neither side has much to gain politically from pushing swift agreement, (economically is a very different matter, both China and US will still suffer), meaning trade doubts drag on and remain a major market concern through rest of year.
The debate over Huawei is also a distraction – whatever is now agreed, Huawei is a damaged brand in the West. The US and China are likely to increasingly diverge down separate tech paths. However, Trump’s readiness to trade the Huawei card could cause him domestic political issues.
In the Long Term little was solved in Osaka. The US and China remain on collision course.
Trump – played the G20, Xi Meeting and Korea meeting with Kim to play to US electorate. Trump is in full election mode which is bad for Fed.
The issue for markets is Trump’s willingness to play the short electoral game. The fact he was willing to trade Huawei for an agreement was fascinating. A few weeks ago he was parading advice on the danger Huawei presents to long-term communications systems and therefore the whole economy. The US neo-cons will be furious. They have argued the US has just a few short-years to take-on China economically before it’s transforming economy is settled, and before the Chinese military becomes an effective deterrent to US geopolitical might. Any delay now makes that long-term reckoning less certain to play towards the US.
What is going to be critical is how market reacts – the big danger is that market believes Fed is going to deliver, and it doesn’t. That’s why I think it’s all about how Powell stands up to Trump in coming months. It’s hardly an encouraging time for markets when it’s the expectations of further Fed easing that’s the dominant factor keeping them afloat, and a President who thinks stocks = economic health!
The current market doesn’t speak of strong companies making sound business decisions. Nor does the downwards direction of global yields make any sense if the economy was strong enough to justify stock prices… Nope it speaks of a Fed feeding markets by easing when it should be normalising rates.
Now why would the Fed ease? Someone should tattoo “Hold Fast” on Powell’s knuckles.
Such is the world we live in. Tomorrow, European leaders and all that stuff.