Larry Kudlow who, bless his heart, has stuck around in the Trump administration despite being consistently proven wrong in his contention that Donald Trump is a “free trader at heart”, said a lot on Monday following the trade truce struck over dinner in Argentina on Saturday.
Analysts and other market commentators are generally skeptical about the odds that the bevy of complex issues at the heart of the trade dispute can in fact be solved during the 90-day ceasefire that was part and parcel of the Trump-Xi detente. Specifically, “experts” are worried that the extremely thorny issues of IP theft and forced technology transfer can’t be satisfactorily addressed in the space of just three months.
Kudlow attempted to allay those concerns, insisting that Washington and Beijing are actually “pretty close on some agreements on IP theft, pretty close to some agreements on the forced transfer of technology from American companies.” Pressed for details on the meaning of “pretty close”, Kudlow would say only this:
[Those] issues are kind of on the front burner, hot list that we’ve developed with them.
Larry also went out of his way to try and validate Trump’s auto tariff tweets. Here is Kudlow’s account of a conversation he had with Vice Premier Liu He:
He said several times, and I pushed him on this, that the China changes with respect to tariffs and non-tariff barriers and other structural issues would begin immediately. I said, ‘What do you mean immediately?’ And he said ‘immediately.’
Ok. So we’re talking “immediately”, then, is that correct?
Obviously, this is all still in flux. There are no concrete details around any of this, which isn’t necessarily bearish considering there was exactly no chance that these kinds of complex negotiations were going to make any headway over a two-hour dinner at the tail-end of a G20 summit.
Kudlow also suggested that the 90-day truce would actually start on January 1, which one assumes is good news (it would effectively mean the market will get four months of reprieve from this insanity instead of three), unless of course Trump were to try and claim he can do whatever he wants between now and the turn of the year, which doesn’t seem likely.
As you might expect, the commentary from the sellside continues to pour in. For their part, BNP thinks the odds of an actual, “real” deal (where that means a comprehensive agreement) have indeed risen. “Beijing is committed to meeting US demands”, the bank writes, in a note dated Monday, adding the following:
[China] agrees that the growing trade imbalance with the US is unsustainable and is eager to reduce the gap through mutual efforts; China is determined to rebalance its growth sources by promoting domestic demand and opening up its domestic market; it is committed to upgrading its growth model by being more reliant on innovation, and IP protection has become its endogenous requirement; SOE monopoly, administrative discrimination, unfair competition and “Guojin Mintui” (the state sector crowding out private business) have been the domestic complaints, and to provide a level playing field for reciprocal competition has become essential for China’s future growth.
As far as the read-through for markets, BNP sees scope for a continuation of the relief rally, although the bank admits it may be short-lived. “After the initial excitement dies down, though, investors may still be concerned about the feasibility of reaching a comprehensive agreement on many of the structural trade issues in just 90 days”, BNP says, before noting that when it comes to the yuan, “a truce offers more support for RMB on top of the dovish tone of the Federal Reserve [and] there is much less possibility of yuan breaking through the 7.0 level.”
On Monday, the offshore yuan extended gains in the New York session, rising the most in more than three months on huge volume.
Meanwhile, Barclays is pretty upbeat about the situation. “We remain optimistic about the possibility of progress being made in the upcoming negotiations, with China making adjustments to address the US concerns in the next three months despite the widely expected volatility and difficulties”, the bank writes, in their own trade truce post-mortem.
The bank also says they “continue to believe China will allow greater market access to a wide range of sectors, make legal institutional changes for better IP protection, and commit to a more fair and level playing field for state versus private/foreign companies, which would serve China’s own interests of growth and development.”
The bottom line for Barclays is that the “better case” scenario outlined in the following table is now more likely.
You can draw your own conclusions. What we would reiterate is that the public’s tolerance for Trump’s quixotic endeavor seems to be waning and the market’s patience ran out a long time ago. Presumably, he’ll have to come to his senses, especially if China does give ground on some of the issues Beijing has previously insisted are non-starters.