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President Trump and China’s President Xi had dinner on Sunday at the G20 summit. Expectations were low going into it with a large concern that there could be a further deterioration in trade talks, and Trump would then impost 25% tariffs on pretty much all goods imported from China.
The official White House press release about the dinner announced the U.S. would delay the tariff increase by 60 days (since the 90 day negotiating timeframe starts on December 1) and that, “China will agree to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries. China has agreed to start purchasing agricultural product from our farmers immediately.”
It was also agreed that the two countries would “immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture.”
Due to all the uncertainty going into the dinner almost anything positive would give the stock markets a boost , which is what happened on Monday when the Dow Jones Industrials rose almost 300 points or 1.1%, and Trump was sending out positive tweets (but isn’t that one would expect from him?).
However, since there was very little concrete agreed to and China didn’t release any official statements until Wednesday (when the U.S. stock markets were closed), Trump’s tweets, which included calling himself “Tariff Man”, helped the Dow Jones crater almost 800 points, or 3.1%, on Tuesday.
The big questions are what agreements can be negotiated and finalized in 90 days and if China doesn’t give in enough on, “structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture” will Tariff Man revert to the 25% level.
Note one very positive outcome from the dinner is China designating Fentanyl as a Controlled Substance. Fentanyl is one of the major scourges creating overdose deaths in the U.S. and is being exported from China (not coming through the southern border). Hopefully, this will help in the battle to save lives.
Tweets that helped the stock market on Monday
Besides the announcement from the White House, Trump started tweeting before the markets opened on Monday. The first tweet was on Sunday evening with Trump stating that China would reduce and remove the tariffs on cars imported into China. It had been increased from 15% to 40% earlier this year.
And while he didn’t tweet about the 90 day delay, he said that China would immediately be buying agriculture products.
With soybeans being one of the hardest commodities the announcements helped increase their price by about 2.5%. They are still significantly below the level from earlier this year (about 10%) when tariffs started to be implemented by both countries (the blue circle in the chart below). One report has soybean exports to China dropping 94% (probably over the past six months) and the Federal Reserve Bank of Minneapolis calculating a rise in farmer bankruptcies to 90 this year. A turnaround in commodity prices may be too late and too little for these and other farmers on the brink of solvency.
Tweets that rocked the stock market on Tuesday
While Trump’s tweets probably weren’t the only reason the Dow Jones Industrials fell just under 800 points on Tuesday, they certainly didn’t help. John Williams, President of the New York Fed, said that the economy could handle more rate hikes and a portion of the yield curve inverted (the 2 to 5 year part). Williams’ comments were made a bit before 11:00 am and the Dow was “only” down about 200 points at that time. Starting at 11:50 am the market fell off a cliff as it dropped 350 points in the next hour. The algorithms that can drive the market up or down in a short timeframe probably also played a part.
However, two of Trump’s early morning Tuesday tweets threw cold water on his previous positive ones . The first was announcing Bob Lighthizer would be the lead negotiator for the U.S. Lighthizer, the U.S. Trade Representative, has a very hawkish view when it comes to trade with China.
The second, and more meaningful tweet, was saying that if a deal is not done that he is the “Tariff Man” and wants China to “pay for the privilege” of trading with the U.S. This is probably a negotiating tactic but if additional tariffs are put in place around March 1 the stock market will almost certainly take a dim view of them.
Trying to calm the markets before they open on Thursday
On Wednesday the People’s Republic of China Ministry of Commerce issued a short question and answer press release regarding the trade negotiations with the U.S. It said:
A reporter asked: We know that the Chinese economic and trade team has returned to Beijing. What is your comment on this meeting?
A: The meeting was very successful and we have confidence in the implementation.
Q: How is China prepared to promote the next economic and trade consultation?
A: The economic and trade teams of the two sides will actively promote the consultation work within 90 days in accordance with a clear timetable and road map.
Q: What are the priorities for China?
A: China will start from implementing specific issues that have reached consensus, and the sooner the better.
While there is very little substance (pretty much none except for the 90 days statement) Trump re-tweeted a portion of it on Wednesday morning.
He had another tweet that China would start “immediately” to buy U.S. products. Overall, I believe the market will take a more negative view of Trump’s upbeat tweets unless there is some confirmation that China is buying enough to make a difference in the trade deficit. The hard part is how much is enough and how long will it last for.
Treasury Secretary Mnuchin said that China made commitments of $1.2 trillion at the dinner. While $1.2 trillion is a huge number given the $500 billion per year goods trade deficit, if China is thinking of a 5 year time frame or longer there will still be a very large deficit. China could also be thinking that it will “purchase” more services, which would mean that shrinking the goods deficit will be less.
And all of this will take years to show a meaningful cut if everything can be hashed out. Since Trump’s attention span is clearly not years, even if a deal is struck it won’t change the numbers fast enough for him.
