Markets Lost In Fog Of Trade War Amid Hopelessly Conflicting Reports

The barrage of seemingly consequential and maddeningly conflicting trade headlines abated a bit after whipsawing US equity futures and the yuan, and things settled into a tenuous drift ahead of discussions between Chinese Vice Premier Liu He, Bob Lighthizer and Steve Mnuchin.

In addition to reports that very little progress was made at deputy-level discussions on Monday and Tuesday, markets attempted to digest rumors of a currency pact and reports that Donald Trump is set to approve a handful of licenses that will allow some US companies to resume sales of nonsensitive goods to Huawei.

That latter bit of incremental news came courtesy of The New York Times, which said that “in a meeting last week, Trump gave the green light to begin approving the licenses, which will allow a select few American companies to bypass [the] ban his administration placed on Huawei this year”.

In mid-August, Wilbur Ross granted a temporary reprieve to Huawei’s suppliers and clients in order to allow time for everyone to make new arrangements before the restrictions announced in May kick in. At the G20 in Osaka,Trump indicated he would fast-track license approvals to help companies struggling with the ban, but when trade tensions escalated anew on August 1, all bets were off.

Meanwhile, China is said to be asking the US to end sanctions on units of its top shipper COSCO as part of any limited deal. Those sanctions were imposed late last month as part of the administration’s “maximum pressure” campaign on Iran.

Read more: Pompeo Slaps Chinese Shipping Companies With Sanctions

In any event, Goldman says it’s still likely that the Trump administration agrees to delay the planned tariff hike on $250 billion in Chinese goods. Those products are already being taxed at 25%, and the rate will go to 30% on October 15 if there’s no breakthrough this week.

“The upcoming APEC Summit on November 16-17 in Santiago, Chile could give Presidents Trump and Xi an opportunity to meet [and] imposing tariffs ahead of this meeting would likely reduce the probability of reaching any sort of agreement ahead of or at that meeting”, Goldman wrote, in a note out just after midnight on Thursday. “To implement the tariff increase scheduled for October 15, USTR must publish a notice in the Federal Register [but] with only six days before the deadline, USTR has not published a notice– in contrast to the tariff increase scheduled for December 15, which was published in August”, the bank adds.

And yet, there are no shortage of reasons to believe that Trump will plow ahead immediately.

For one thing, the prospects for a “real” (i.e., comprehensive) deal are obviously remote. Most reporting suggests that China hasn’t been willing to engage meaningfully on subsidies, IP theft and forced technology transfer this week, instead steering the discussion towards agricultural purchases. That may reflect Beijing’s assumption that Trump is losing leverage as the impeachment probe spirals and the US economy decelerates.

Then there’s the ill-timed escalations on Monday and Tuesday, which Goldman addresses.

“The Department of Commerce’s announcement on October 7 that it will block technology exports by adding 28 Chinese organizations, primarily technology companies, to the Entity List appears to have increased tensions”, the bank notes. “That the announcement comes so soon before the meeting could be interpreted as a sign that preliminary discussions have not been successful”.

Then again, the US side has been keen to suggest that somehow the blacklisting of Hikvision and the subsequent travel ban on Chinese officials involved in human rights abuses can be separate from the trade talks. The actions “could also reflect a somewhat separate set of issues, as the Entity List designation explicitly deals with US complaints regarding human rights, and comes on the heels of a dispute over high-profile public comments on the issue by NBA officials”, Goldman goes on to write.

While the fate of the October 15 tariff increase is a key short-term concern for markets given what a delay would mean for sentiment and thereby for lopsided positioning, the bigger question from a macro standpoint is the planned December escalation.

“The goods on that list are predominantly consumer-focused, difficult to source elsewhere–over 75% of all imports of the goods in this round are imported from China–and are the only imports from China that have not seen tariff increases over the last year”, Goldman reminds you, on the way to noting that on the bank’s estimates, “implementation of the tariffs scheduled for December 15 would have a peak negative effect on real GDP growth of about -0.15pp, compared to only -0.05pp for the tariff increase proposed for October 15”.

(Goldman)

And don’t forget that the timing – four days after the December FOMC and ten days before Christmas – of that December round matters.

“If trade policy is the main channel through which President Trump influences the Fed, we believe he will have an incentive to keep the December tariff increase on schedule for as long as possible, potentially until after the Fed meets in December”, Goldman notes.

And yet, slapping tariffs on billions of consumer goods just a week ahead of Christmas could be a potentially disastrous move from a public opinion perspective.

It would be the second year in a row that the White House has undermined market sentiment during the holidays. Last year, amid the worst December slide in US stocks since the Great Depression, the president forced a government shutdown.

And to think, Trump is the man who ended “the war on Christmas”.