Our immediate knee-jerk reaction to the details of the trade “truce” struck on Saturday by Donald Trump and Xi Jinping over dinner in Argentina was that it probably exceeded market expectations.
Although it amounts to a can-kicking exercise, the fact that the tariff rate on the $200 billion in Chinese goods that were taxed from September 24 won’t rise to 25% on January 1 is good news for those concerned about tariff-related margin headwinds for U.S. corporates at a time when wage pressures and higher interest rates are already set to bite.
Further, the publication of a list in conjunction with tariffs on the remainder of Chinese imports is now postponed indefinitely (or so it seems), which removes a big overhang for risk sentiment.
Obviously, we could be mistaken in our assessment and this could all crash and burn in spectacular fashion, but it looks like some of the early analyst commentary aligns with our read.
“While the consensus view heading into the Xi-Trump meeting was the optics would be constructive, the postponement of tariff hikes is a positive surprise while the lack of progress on core issues (such as intellectual property) is no surprise’, BofAML writes, in a note out Sunday, adding that while “the cynical view is that this may only buy time in what appears to be an increasingly challenging global economy and financial markets”, the bottom line for emerging market investors is that “a window of a few months without tariff escalation makes it hard to remain on the sidelines.” As such, the bank expects “the news to provide some tactical relief.”
If you’re the type who likes a little nuance when it comes to assessing how the market really feels about this interim deal, BofAML says one good proxy is the Brazil-US soybean spread. We alluded to this earlier on Sunday in light of the White House’s contention that China will start buying more U.S. agricultural product “immediately” as part of the truce.
“The spread between Brazil-US soy bean prices is one metric that seemingly priced in some optimism heading into the meeting and should be watched closely as a barometer given that China’s farmers are being instructed to buy US agricultural imports with immediate effect”, BofAML notes. The following scatter suggests that the offshore yuan should rally to 6.60 on positive trade news.
That would be one helluva rally in the yuan, and to be sure, some traders were positioned for yuan strength headed into the G20.
Presumably, the truce alleviates the need for further aggressive monetary easing from the PBoC which, when combined with the Fed’s newly-dovish tilt, could potentially lead to less of a policy divergence between the U.S. and China, which would be yuan+ for obvious reasons.