Trade war talks amidst tumbling markets
The Star Online (19/11/2018) - IN May, the US and China had agreed on a ceasefire in their trade dispute which instead has ballooned to US$250bil tariffs on Chinese imports.
Will the talks this time around, under an environment of higher costs, loss of markets, destruction of supply chains, and tumbling markets yield anything different?
The most visible difference is that the talks are between leaders at the highest level; President Donald Trump is appearing at regular intervals lately, sounding upbeat on the deal.
After being disappointed several times, investors are viewing the latest developments with caution, as risk aversion and reduced liquidity, among other things, continue to rattle markets.
That there is some thawing in relations gave markets a straw to hang on especially when Trump said he may not impose additional tariffs on China, despite his officials saying otherwise.
In a written response, China had outlined possible concessions to the US, which reportedly fall short of structural demands from the US.
Perhaps they can agree to a framework (hopefully, in this round) for further negotiations.
“We are putting the trade war on hold,’’ Treasury secretary Steven Mnuchin had said in May. “We have agreed to put tariffs on hold while we try to execute the framework.’’
Some of the officials who did not get the framework through previously, are again handling the talks this time.
Push factors for a deal are getting stronger, as the worst is yet to come for China’s economy after the front loading of exports, possibly by spring of next year.
China’s dollar debt at US$3 trillion, is feared to be able to trigger a financial crisis with rising US rates, a weakening yuan and the raging trade war.
Also by next year, the US economy, which is strong now, may face some headwinds, Fed chairman Jerome Powell said.
Slowing global growth, fading US fiscal stimulus, impact of US rate increases on housing and tightening financial conditions are challenges for the Fed, going into next year.
Complaints from US companies and soybean farmers of rising costs and low crop prices, brings on greater pressure to do a deal with China.
US soybean farmers, suffering from China’s retaliatory tariffs, are reportedly looking high and low for storage space for crops that they cannot sell due to very low prices.
US small caps, which had out-performed the rest of the market earlier this year, saw the formation of a death cross (a chart pattern that indicates the potential for a major sell-off) on the Russell 2000 index.
Among their other woes, 29% of companies in the S&P Small Cap 600 that have reported earnings, said tariffs were a drag on their business, said Bloomberg, quoting Bank of America.
A similar 31% of companies in the S&P 500 also complained about the impact from tariffs.
A spike in delinquent student loans follows the upward creep of autoloan and credit card delinquencies in the US.
Crashes in the cryptocurrency and oil markets point to risks of a flash crash in markets where prices decline very rapidly.
China’s holding of US Treasuries fell for a fourth month in September, to more than a one-year low, at US$1.15 trillion.
Still the largest foreign creditor to the US, China is trying to stabilise its currency which has weakened due to, among other factors, the trade war.
Among the major factors sinking markets and economies, the trade war is a headwind that should be dealt with quickly, especially while things are still holding up.
Under the worst case scenario, it is feared that this trade fight involving two powerhouses can cause a recession.
“A truce in the trade war will remove one of the headwinds that undermine confidence in markets and global growth; for China, it will be a big relief at a time when its economy is slowing down,’’ says Lee Heng Guie, executive director, Socio Economic Research Centre.
By next year, Malaysia can be impacted by a slowdown in global trade; “its real Gross Domestic Product growth can go below its long term trend, especially if domestic demand growth starts to moderate as well,’’ says Nor Zahidi Alias, associate director, economic research, Malaysian Rating Corporation.
Countries must see beyond their own agenda. For one, financial markets are beginning to blow up in odd corners.
“Then, they spread to the center; that is how crises always start,’’ says Pong Teng Siew, head of research, Inter-Pacific Securities.
Columnist Yap Leng Kuen views that we should not delude ourselves by thinking that we are still doing well.