Trade Truce Or No Truce?

The trade dispute with China and the Federal Reserve’s (Fed) continual hiking of interest rates are the two most important drivers of the market’s recent volatility. We had a great lineup on Friday’s “Behind the Markets” podcast discussing these two critical issues, which included Wharton Professor Jeremy Siegel, Liqian Ren of WisdomTree, Marc Chandler of Bannockburn Global Forex and Andy Rothman of Matthews Asia.

Professor Siegel believes the speech last week by Federal Reserve Chairman Jerome Powell and his critical words “the Fed Funds Rate is not far from the neutral rate” settles Trump’s assault on Powell as the whipping boy and cause of market volatility—now the primary issue Trump must confront for causing market volatility is his trade dispute with China.

Although the headlines over the weekend were positive and we’ve avoided the worst-case scenario, the issues are far from solved.

Chandler was the glummest and most concerned of our podcast participants and suggested we’ve entered a new “Cold War” with China that will divide the world. He highlighted a clause in the new North American Free Trade Agreement with Canada and Mexico that forbids entering into a trade agreement with a non-market economy (code for China). Chandler thinks this was precedent-setting and future trade agreements with Europe will contain a similar clause. China is also taking a similar tack in their global deals by saying that if you want Chinese aid, you cannot recognize Taiwan.

Going into the G20 meetings this past weekend, Rothman did not think we would get a full resolution, but rather that we would see signs of a truce. Rothman pointed out how even Trump’s own economic team finds a trade war could subtract 50 to 100 basis points off GDP growth in 2019, and this is affecting the markets, sentiment and corporate profits—all against Trump goals. It turned out that Rothman was exactly right, as President Trump’s and President Xi’s teams met during the summit and agreed to a 90-day “ceasefire” of the trade war.

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