Snapshot - Market News
Trump-Xi trade truce: what next?
Quickview: The trade truce between the US and China is a positive outcome, but we expect hostilities to resume later next year.
- What happened: The US is to delay implementing a tariff increase to 25% (from 10%) on $200bn of goods. The increase was due to come into effect in January. China is to increase its imports from the US. 90 days of talks on structural issues are scheduled.
- Asian markets rallied on the news: China’s CSI 300 index closed up 2.8% on Monday, while Hong Kong’s Hang Seng Index rose 2.8%.
This is a better-than-expected outcome which will hold back an escalation of the trade wars in the New Year. However, we remain sceptical on the prospects for a longer-term agreement on issues such as intellectual property rights and expect a resumption of hostilities later in the year.
It is possible that the deal reflects a weakened US president after the mid-term elections, who has become more aware of the damage tariffs can cause. Certainly, this action will reduce the immediate impact on inflation from higher tariffs in 2019 which in turn can help the Federal Reserve pause rates.
Business will also be relieved not to be facing a further escalation of import costs. Both are positive for an economy which we expect to lose momentum next year as fiscal stimulus fades.
The question is how long can the truce hold? Signs of future tension were immediately apparent in the two sides’ respective press conferences, with the US emphasising that 25% tariffs would be imposed if no agreement is reached after 90 days, while China talked of reducing existing tariffs.
The outcome of the talks is better than expected but the differences on intellectual property and the treatment of technology in China are likely to prove major obstacles to a lasting agreement. The trade hawks in the White House will continue to press their case, which is shared by the Trump base. Meanwhile it is hard to see President Xi Jinping abandoning China’s position on intellectual property.
So, although there’s a truce - a peace deal will have to wait.
The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored.