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Wednesday, 11 April 2018
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Trade War Over?

The Chinese President Xi Jinping made a speech Tuesday which left the Dow Jones futures up 260 points as our market closed. It has done better than that with a 428 point rise Tuesday night, the fifth day of gains in the last six days. It was Xi Jinping’s first public comment since Trump began his trade tariff campaign. Main points from Xi Jinping’s speech:

  • The newswires describe him as “conciliatory” on trade.
  • He promised to cut import tariffs.
  • “Vowed” to open China’s economy further.
  • Vowed to protect intellectual property of foreign firms.
  • Criticised a “Cold War mentality” as obsolete.

In response, Trump has tweeted that he is “Very thankful for President Xi of China’s kind words on tariffs and automobile barriers”. As one US fund manager says, they are now trying to reposition themselves for “no trade war”.

The benefit seems to be the most obvious in resources with BHP up 4.95% in the US overnight and RIO up 4.34%. The oil price has also jumped 3.4% and the energy sector was up 3.36%. A trade war threatened energy prices through a reduction in GDP. The resources sector was up 2.09% in the US. Financials a little bit ignored but still up on the day.

As I wrote yesterday my guess is that the trade threats from Trump, and the reasonable retaliation by China, will at some time, possibly soon, and possibly abruptly, end. China is clearly open to a trade deal and the Chinese President’s speech has laid the ground work for the US to simply declare an agreement.

Trump has been scoring image points through this whole process, by posturing in public, by negotiating with the Chinese in public, but this has to end with an inevitable agreement, and rather than risk a damaging trade mistake, Trump is smart enough not to let that agreement get away from him.

Trump had been duty-bound through his election promises to defy China at some level. He has done that. He has made his point, has stood his ground, and as such could emerge at any moment with a credibility building trade agreement that pleases all parties and improves his own political standing. It is political rather than economic and on that basis, my guess is that the risk is not that the US economy, and therefore the US stock market, is damaged by the current trade issues, but that they are suddenly, miraculously, improved in one moment by a conciliatory tweet.

It has been a very poor quarter for the equity markets. Both the S&P 500 and the Dow Jones ended nine quarterly streaks of gains, the longest streak since 1997. The UK market fell 2.2% in the March QA, Germany fell 2.73%, while France managed a small rise. The Chinese market fell 2.78% with Japan down 2.94%.

As the US market sneezed the ASX 200 fell 4.26% in March and in so doing recorded the worst March quarter since the GFC. It closed 1.8% lower than a year ago and 2.3% below the level it was at the end of the first quarter in 2015. It was down 5.04% or 306 points in the March quarter. There have only been two worse March quarters in the last 25 years, in 2008 (down 15%) and in 1994 (down 6.3%).

The bottom line is that this could be the low in the US market, which is already up for 5 of the last six days.

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