The Trump Effect: Will Beijing Buckle or Retaliate

The Asian equity markets took a hammering this morning and the European majors are following suit at the time of writing.

On Thursday, Trump’s delivered his latest Twitter Tirade following the end to trade talks earlier in the week.

Market expectations of a resolution to the extended U.S – China trade war were low. Perhaps the U.S President was looking for more than an agreement to continue talks next month.

China had reportedly committed to increasing the import of agriculture products. Technology transfer and Huawei have yet to be resolved, however. There’s likely to be some doubt as to just how much of a boost in demand for agri there will be.

While the U.S President has had a tendency to Tweet ahead of scheduled talks, the latest Tweets suggest that there’s unlikely to be too much coming from Beijing.

It’s no secret that the U.S president believes that China is stalling on any trade commitments, with the U.S presidential elections scheduled for next year.

A commitment to long-lasting trade terms could be more damaging to China than any short-term pain. The U.S administration’s demands for China to boost the import of U.S agri is a clear indicator that Trump is also conscious of the negative impact of the trade war on his chances of reelection.

The FED has already cut rates as the extended trade war takes a deeper bite into global demand. Further economic stress as the presidential campaign heats up would be something Trump will need to avoid.

Beijing

When considering Beijing’s stance, it continues to be hard to imagine that Chinese negotiators would buckle at this stage.

The Chinese economy has suffered as a result of the trade war. Chinese government support will likely limit any material slowdown near-term, however.

The good news for Beijing is that the FED continues to maintain its impartiality. The FED’s concerns over the effects of the trade war on the U.S and global economy squarely places the blame of the softer economic growth on the U.S administration.

Trump will need to turn things around in the coming quarter to deliver an economic boost going into next summer.

Beijing may have other ideas, however. The U.S administration continues to be unwilling to budge on Huawei following its blacklisting. Until that changes, we can expect Beijing to stand firm, extra tariffs or not.

Should the U.S economy continue to soften, rising inflation and a likely shift in labor market conditions would have a material impact on consumption. After all, even with tariffs, Chinese goods continue to be more competitive than U.S manufactured goods.

Both service sector activity and retail sales would likely be hit hard. In such an instance, the U.S administration would struggle to reverse such an outcome ahead of the November 2020 presidential elections.

While the welfare of U.S farmers is an important consideration, there’s far more at stake.

The Dollar

At the time of writing, the Greenback was down by 0.15% to 98.25. Market reaction to Trump’s tweets and sentiment towards the U.S – China trade war have ultimately pinned the Dollar back.

With nonfarm payrolls and wage growth figures due out later today, we can expect plenty of scrutiny and reaction.

While positive numbers may have a relatively muted impact, disappointing numbers will likely weigh heavily. Particularly when considering the pace and lack of progress in the trade negotiations.