‘Trade Tensions Have Not Disappeared’, Goldman Warns

Markets appeared pleased on Friday morning with reports that the US and China will continue trade talks in Washington next week, following the conclusion of negotiations in Beijing, where everyone was, as usual, keen to suggest that important progress has been made despite a demonstrable lack of evidence to support that contention.

For now, as long as talks can be described as “ongoing’, markets are willing to give Washington and Beijing the benefit of the doubt. The assumption continues to be that the Trump administration will extend the March deadline and postpone the planned tariff hike. The higher the likelihood the market assigns to that, the more damaging a disappointment would be, where “disappointment” would entail Trump deciding that not enough progress has been made to justify a decision to extend the deadline.

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US, China Will Hold Do-Over Trade Talks In Washington As Einsteinian Insanity Takes Hold

If you ask Goldman, the probability of an extension on the March 1 deadline is “very high.” “The potential meeting between Presidents Trump and Xi in mid-March argues for a short-term extension at least until after the meeting has occurred”, the bank writes, in a Friday note warning that while trade tensions might have “diminished”, they have most assuredly “not disappeared.”

The mere fact that Trump and Xi will likely meet again next month reduces the odds that the tariff rate on the $200 billion in Chinese goods that were taxed at 10% from September 24 will be hiked to 25%, Goldman reckons. The bank cites three reasons for that benign take. To wit:

1. In prior in-person meetings with foreign leaders, President Trump has often taken a more conciliatory stance than he has when making decisions at a distance.
2. The President’s own comments suggest he is leaning toward a deal: he noted Feb. 13 that the negotiations in Beijing were going “very well” and two weeks ago he stated that a deal “has a very good chance of happening.”
3. Both of these factors are increasing expectations in financial markets that an agreement will be reached.

That latter point is a reiteration of what we said above and frankly, that’s probably the most influential factor of all. Thanks to the V-shaped recovery in stocks off the December lows, there’s a lot to lose in a no-deal scenario.

Goldman’s baseline scenario calls for a “pause”, where that entails “immediate and concrete deliverables in easier-to-achieve areas, such as a Chinese commitment to increase purchases of US exports over the next several years, commitments on opening access to the Chinese market in certain sectors where foreign ownership is restricted, and tariff reductions”, while a “real deal” (as Trump is fond of calling it), would come after an assumed second deadline, around May or June.

In the same note, Goldman warns that the auto tariff situation is likely to get worse before it gets better.

After reminding you that the Commerce Department is staring at a February 17 deadline on the Section 232 report and is likely to recommend tariffs, Goldman cautions that “a report recommending auto tariffs could come as a slight surprise to financial markets, in light of apparently easing US-China tensions.” Here’s what the bank thinks is likely when it comes to prospective car duties (and this is truncated in the interest of brevity):

We believe the decision on auto tariffs is more likely (60% chance) to be incremental in nature. This could involve targeting only advanced vehicles for tariffs, or imposing quotas set at a high enough level compared with current import volumes, so as not to immediately restrict trade (this is the approach the Trump Administration took in the USMCA with Canada and Mexico), for example. It might also simply involve concessions from individual foreign automakers, particularly the large German companies, to locate more production in the US.

[…]

That said, there is a meaningful risk (40% chance) of broader auto tariffs, in our view. First, President Trump has been particularly focused on the auto sector in trade discussions. Second, it is also possible that tariffs implemented, at least temporarily, in an attempt to bring the EU and/or Japan to make greater concessions than they have offered to date.

This comes as European car sales just suffered through a fifth consecutive monthly decline.

“Demand for new cars fell across almost the entire European Union, including the EU’s five major markets”, the ACEA said Friday, adding that “Spain and Italy posted the strongest declines (down 8.0% and 7.5% respectively), while percentage drops were more modest in the United Kingdom (‐1.6%), Germany (‐1.4%) and France (‐1.1%).” Here’s a chart:

(ACEA)

Given all the above, one might very fairly ask whether the nascent bounce in European autos is a bit premature. The sector has suffered mightily over the past year, but January was the best month for the SXAP since July 2016.