Capital Markets: "Phase 1 Trade Deal Shifts Terrain of US-China Rivalry"

From Marc to Market:

Overview: News that US tariffs on China will remain until through at least the November US election and continued US attempts to stymie China (e.g., more curbs on Huawei under consideration and stepped up efforts to force it to cut subsidies to business) have taken some momentum from the push into risk assets. The MSCI Asia Pacific Index snapped a four-day advance today, with only Australian equities among the large regional markets able to sustain upticks. Europe's Dow Jones Stoxx 600 is hoving near record highs and is little changed through the morning session. US shares are also little changed. Benchmark 10-year yields are mostly 2-3 basis points lower, though the rate adjustment in the UK continues. The dollar is mixed, with sterling, the Antipodean and Scandis heavier, and leaving the Swiss franc, Japanese yen, and the euro slightly firmer. Emerging market currencies are mostly heavier, with the Chinese yuan slipping for the first time in five sessions. March light sweet crude oil continues to staddle the $58 a barrel level, while gold is recovering from the pullback that saw $1536 yesterday. It is back above $1550 today.

Asia Pacific
The signing ceremony for Phase 1 of the US-China trade deal is at hand. The actual text of the agreement has been closely guarded. As an executive agreement, which does not require Congressional consent (e.g., NAFTA 2..0) the secrecy is allowed. The US has indicated that even after the deal is published, an annex that details the amounts of goods that China has agreed to purchase will remain confidential. While US officials have denied the existence of other secret deals, the market suspects otherwise. Consider the report that acknowledged that there was nothing in the formal agreement about the tariffs. It turns out that there is an "understanding" that the existing tariffs will not be addressed for ten months after the signing, which incidentally is also after the US national elections. The US wants to monitor implementation before making any concessions.

On commitments for which there is a quantitative target, an assessment may be straightforward. However, qualitative issues are different. Consider currency manipulation and the fact that the US resorted to a 1988 definition rather than the quantitative one that Congress provided in 2015. China has denied claims of systematically "stealing" foreign technology, and it has stiffened penalties for intellectual property violations. Again, judgment calls will be required, which is different than China's target is to boost the US goods by $200 bln over two years. It seems little has been secured that could not have been achieved two years ago when President Trump rejected the trade agreement that Treasury Secretary Mnuchin had struck. Leaving aside the rhetoric and domestic messaging, to get to the deeper structural issues, it is clear that a multilateral approach is necessary, such as the initiative that was taken this week at the WTO by the US, Europe, and Japan to broaden and deepen prohibitions of state subsidies. This is important because almost 2/3 of traded goods compete with businesses that receive subsidies....

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