Wednesday, December 4, 2019
Trump's trade war will never end
On Tuesday, stocks sank for a third straight day.
At Tuesday’s lows, the market was in the midst of its worst session in two months.
The reason? Trade.
For what seemed like the thousandth time this year, concerns about the U.S.-China trade spat pushed markets lower after Trump said the trade fight could continue past the 2020 election.
“In some ways, I like the idea of waiting until after the election for the China deal, but they want to make a deal now and we will see whether or not the deal is going to be right,” Trump said in London.
Follow-up reports on Tuesday suggested that tariffs on Chinese imports set to take effect on December 15 would indeed be implemented. The delay of these tariffs was seen as a major part of the market's optimism around a "phase one" trade deal.
But Trump's trade spats go beyond the China negotiations that are so closely tracked by investors.
Earlier this week, Trump announced plans to re-implement tariffs on steel and aluminum imports from Brazil and Argentina. The USTR also said on Monday it is also exploring tariffs on some French imports as a retaliatory measure to taxes imposed by France on U.S. internet companies.
And the breadth of Trump's trade fights — re-negotiating NAFTA, starting a trade fight with China, threatening to tax auto imports from the E.U. — are reinforced by the simple fact that on trade, Trump can start, extend, and finish (almost) any deal he wishes.
As Bloomberg's Tracy Alloway said on Twitter this week, Trump's use of trade a "flexible policy tool" is taking shape as the enduring market-related legacy of his administration. "[Tariffs] allow [Trump] to bypass the Fed (and Congress) to impact financial conditions."
In other words, trade moves markets and Trump loves taking credit for market moves. Nothing, of course, seems to frustrate Trump as much as his inability to directly influence monetary policy and, by extension, the stock market.
Since December started, Trump has tweeted about Fed policy no fewer than four times. Complaining about Jay Powell and outlining the perceived mistakes made by the Fed chair is a running theme on the president's Twitter feed. But direct intervention in monetary policy by Trump is seen as a near-impossibility by most investors.
With Congress divided, the policy tweaks typically available to presidents who have party control in both Houses of Congress are off the table for Trump right now. This makes it unlikely additional tax cuts will be passed during Trump's first term. Same goes for a massive infrastructure bill. Or a sweeping change to health care.
So passing bills is out; making changes to trade policies the administration can alter without Congressional approval is in.
"Taxing trade is one of the few things the U.S. president can do alone," said UBS strategist Paul Donovan in an email on Tuesday. "Companies have spent years believing that they can operate global supply chains. Trust in global supply chains is threatened when a Trump trade deal does not seem to last more than a few months."
This lack of trust in Trump’s ultimate direction on trade underpins views from some Wall Street economists that global growth will remained challenge with or without any U.S.-China trade agreements.
“A trade deal could have positive effects on business confidence and on financial markets,” said Jennifer McKeown at Capital Economics. “Indeed, when we argued in the summer that the trade war had knocked about 0.3 ppts off global GDP, we said that 0.2 ppts of this related to such indirect effects. But we suspect that much of the good news has already been priced in by both businesses and financial markets.”
“The bigger point is that any deal would do little to address the fundamental issues that the U.S. has with China’s economic model and tensions therefore look set to persist.”
What to watch today
7 a.m. ET: MBA Mortgage Applications, week ended November 29 (1.5% prior)
8:15 a.m. ET: ADP Employment Change, November (140,000 expected, 125,000 in October)
9:45 a.m. ET: Markit U.S. Services PMI, November final (51.6 expected, 51.6 prior)
9:45 a.m. ET: Markit U.S. Composite PMI, November final (51.9 prior)
10 a.m. ET: ISM Non-Manufacturing Index, November (54.5 expected, 54.7 in October)
7:30 a.m. ET: Campbell Soup Company (CPB) is expected to report fiscal first-quarter adjusted earnings of 71 cents per share on $2.19 billion in revenue
4:15 p.m. ET: Slack (WORK) is expected to report a third-quarter adjusted loss of 8 cents per share on $156.23 million in revenue
Other notable report: RH (RH)
Pound hits 7-month high on election optimism [Yahoo Finance UK]
The biggest part of the UK economy is shrinking as election and Brexit loom [Yahoo Finance UK]