When Donald Trump and European Commission President Jean-Claude Juncker strode out into the Rose Garden on Wednesday afternoon for a hastily-arranged press conference, it came as something of a surprise to market participants.
Exactly nobody was expecting much from the pow wow and to the extent the bar was already set pretty low, it was ratcheted down another couple of notches on Wednesday morning when The Washington Post reported that the President’s aides and advisors were becoming increasingly concerned that Trump was determined to move ahead with the auto tariffs irrespective of any and all efforts to dissuade him.
To be clear, there were at least some indications that someone (be it Juncker or, less likely, Trump) was actually coming to the meeting with proposals in hand. Larry Kudlow suggested as much on a couple of occasions, but at this point, markets are a bit jaded when it comes to Trump and trade. The President’s early morning “No weakness!” tweet didn’t do anything to dispel the notion that he was feeling as belligerent as ever ahead of the Juncker talks.
So it was indeed a bit perplexing when a visibly pleased Trump, standing beside “Jean”, said this on Wednesday, just hours after the meeting with E.U. officials began:
The “deal” (if that’s what you want to call it) was long on rhetoric and short on conviction, attempts to spell out the specifics not withstanding.
For one thing, the possibility that the E.U. will buy more soybeans from the U.S. seems to raise the odds that Trump will become even more recalcitrant when it comes to China, but sticking strictly to the U.S.-Europe trade relationship, Bloomberg notes the following:
[While] Juncker and Trump agreed to refrain from “unilateral actions” as the EU and the U.S. negotiate a trade pact, an Commerce Department investigation under an act that permits the imposition trade restrictions if car imports are found to harm national security is still ongoing, keeping up the pressure on major exporting nations.
Correct. And the lack of detail about how that might ultimately be resolved didn’t go unnoticed on Wednesday.
“Notably, the announcement did not mention EU auto tariffs specifically, even though reducing the differential between the EU’s 10% tariff on auto imports and the US 2.5% tariff on cars has been a frequently cited White House goal”, Goldman wrote, adding that “this could reflect internal EU disagreement over the issue or it could represent a strategy to save auto tariff reductions until later in the negotiation.”
Whatever it “reflects” or “represents”, it leaves the auto tariffs in limbo at best and “still in the cards” at worst, something officials from the E.U., Canada, Mexico, South Korea and Japan seemingly realize, because according to the Bloomberg article linked above, those countries are now planning to meet in Geneva on July 31 to chat about what to do in the event a certain “very stable genius” moves ahead with the auto tariffs as his advisors seem to think he might.
Apparently, the Geneva summit will focus on hammering out some kind of plurilateral deal consistent with WTO rules around such accords. Here’s the list of attendees, according to Bloomberg’s sources:
Participants planning to attend the meeting include EU’s Director-General for Trade Jean-Luc Demarty, Mexico’s Undersecretary of Foreign Trade Juan Carlos Baker, Canadian Deputy Minister of International Trade Timothy Sargent and Japanese Senior Deputy Minister for Foreign Affairs Kazuyuki Yamazaki.
For his part, BofAML’s David Woo thinks the Trump-Juncker “deal” is important not so much for what was (or, perhaps more appropriately, wasn’t) agreed, but rather for what it might mean for future negotiations.
“We believe the most important implication of the deal is its potential positive externality – it could help Trump bring other countries like Canada and China to the table”, Woo wrote, in a note dated Wednesday, adding that “game theory tells us that, in a global trade war, nobody likes to be left out from a deal.”
In any event, one thing that’s notable is that the ongoing threat of a trade conflict appears to be manifesting itself more in U.S. markets than meets the eye. Specifically, Woo observes that “the yield curve has been flattening so much lately that the bond market last week briefly priced in a Fed rate cut already in 2020.”
He also reminds you that “the recent extreme underperformance of the cyclically-sensitive Industrials sector to the broader index is comparable to what happened during the Eurozone crisis in 2012 and China hard-landing fears in 2015.” The following chart (which illustrates that point) is pretty remarkable considering how robust the incoming economic data has been stateside.
“While US economic data are strong, concerns about trade conflict and decelerating global growth have discouraged investors from owning many cyclical stocks”, Goldman wrote on Friday, echoing Woo’s assessment and pointing out that “despite the US ISM currently at 60, the Industrials sector has lagged the S&P 500 by 300 bp during the last three months.”
Again, you don’t have to look very far to figure out what might be weighing on the outlook. In fact, all you have to do is ask the 231 asset managers with a combined $663 billion in AUM who responded to BofAML’s most recent Global Fund Manager Survey, which showed that the biggest tail risk for markets is “Trade War”.
The survey was conducted from July 6th to July 12th, but something tells me the Trump-Juncker agreement didn’t do much to change “hearts and minds”.