The market doesn’t go up every day so it’s important not to over-react to minor weakness. As of the close today New York time the Standard & Poor’s 500 index was off a slight 0.03%; the Dow Jones Industrial Average had slipped 0.05%. The NASDAQ Composite was down 0.01% and the Russell 2000 small cap index was down 0.29%.
This negative blip breaks the market’s longest consecutive upward move in the last two months.
I have a sense that there’s renewed worry about the U.S.-China trade war at the core of today’s stall.
President Donald Trump has issued what is essentially an ultimatum to China’s President Xi Jinping: Meet with me to talk a trade deal one-on-one at the June 28-29 G20 meeting in Japan on June 28-29, or I’ll raise tariffs on an additional $320 billion in China exports to the United States. (Trump escalated that threat Monday by saying that the new tariffs would be much higher than 25%, the top rate imposed on Chinese exports to the United States in earlier rounds of tariff moves.)
The worry that Wall Street is now turning over in its collective mind is that Trump may have talked Xi into a corner. If the Chinese President meets with Trump in an effort to start talks, it could look like he has given in to pressure from the U.S. President and that would make him look weak. But refusing to meet carries its own costs since China’s economy is slowing and higher U.S. tariffs are indeed part of the reason for that slowdown. In May China’s exports returned to growth despite U.S. tariffs but the growth was just 1.1% year over year. Economists surveyed by Bloomberg had projected a decline of 3.8% year over year in May after April exports fell 2.7% year over year. Chinese imports, however, fell a much steeper than expected 8.5% in May, the sharpest drop since July 2016. The drop in imports is a sign that the Chinese economy is slowing as companies import smaller amounts of raw materials and partially assembled goods, and consumers cut back on spending. (The rise in exports may be a result of Chinese companies rushing to get goods out the door before higher tariffs go into effect. If that’s the case the increase in exports is a result of “borrowing” from future export volumes.)
However, I’d note that Xi doesn’t have just a binary set of options–talk or no talk.
He could, and this gets my vote for the most likely strategy, show strength ahead of a decision on G20 talks by imposing something big such as restrictions on rare earth exports to the United States or announcing something tough such as a specific list of U.S. companies facing restrictions on their business in China because they have been found to be acting against China’s interests.
There’s a whiff of that kind of dual track approach in the People’s Bank recent decision to allow local governments to tap into special bond offerings to finance local projects. That’s a move designed to support economic growth and add jobs at the local level–as well as providing relief for hard-pressed local governments.
Announcing something big would let President Xi then remove these restrictions after meeting with Trump–which would be a leaf from Trump’s own playbook of setting up tough positions before talks and then as a result of the face-to-face meeting announcing concessions by the other side in exchange for dropping U.S. demands. That’s the pattern in the recently included (maybe) Mexico talks. (The U.S. President continues to maintain that there are secret side agreements to the publicly announced results of the negotiations with Mexico. He has the option to announce those side agreements, the President has tweeted, when he pleases. No party to the actual sessions has confirmed the existence of these secret agreements.)
Such a flourish of extreme positions by President XI–even if withdrawn after an actual meeting–would still introduce more uncertainty than U.S. and global financial markets would like, but that would still be better, the market is likely to say, than a complete refusal to talk. That would leave financial markets pondering the very real possibility that the U.S.-China trade war will drag on until the November 2020 elections because bashing China is a winning position with a big portion of President Trump’s political base.
My own opinion is that the White House does intend to keep the trade war going until November 2020–although that doesn’t preclude volatility-inducing actions or rhetoric from both sides in the meantime.