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More Than Just Gamesmanship

by Catherine Trinder Miller, May 7, 2019


Please find HERE insights from Raymond James Chief Investment Officer, Larry Adam, and Washington Policy Analyst, Ed Mills, regarding escalation in U.S./China trade rhetoric and potential implications for financial markets.

I participated in a call with Ed Mills today during which he shared the following insights. The threat of tariff escalation is NOT Trump solely trying to gain negotiating leverage. This was confirmed by sources including U.S. and Chinese trade experts and associations with whom Mills speaks. It is a direct response to slippage in deal-terms. Mills understanding is that when Vice Premier Liu He, China’s top trade negotiator, presented the deal to President Xi Jinping, it was vetoed. Particular concerns surrounded deal-terms related to forced technology transfer and China’s subsidies to State-owned enterprises.

We are mindful of risks inherent in potential disruptions to a US/China trade deal. Fortunately, the U.S. is bargaining from a position of relative power given the improvement we have seen in our domestic economy year to date. While global financial markets are complex, at the core we can attribute much of the equity market recovery this year to the following three factors which drive asset pricing:

  • Low and stable interest rates keeping lending conditions supportive of growth.
  • Better than expected economic growth, particularly relative to recessionary expectations that consumed equity markets in the fourth quarter of 2018.
  • Moderate inflation permitting the Federal Reserve to be patient and steady in interest rate path, even as the economy continues to grow.

Second level thinking requires us, as investors, to consider how potential derailment in trade progress could impact the above key factors that drive asset pricing. Growth and inflation are the two most vulnerable should tariffs, in fact, increase. We are closely watching financial conditions, and in particular, awaiting China’s response to Trump’s tariff-driven escalation. We are encouraged that a Chinese delegation of trade representatives remains scheduled to arrive in Washington this Thursday. Vice Premier, Liu He, whose participation is considered essential to ‘closing’ a deal with China, will join.

We remain diversified in our asset exposures in a manner consistent with clients’ near term and long term goals, and vigilant in assessing potential implications of various trade outcomes.

Bottom Line (Per Raymond James Chief Investment Officer, Larry Adam): In the end, we still think a trade deal gets done and equities ultimately move higher. President Trump knows the negative consequences to the economy from tariffs and will need a strong economy to get re-elected. China, on the other hand, was just starting to get some economic momentum and cannot afford to keep stimulating with its own budget deficit nearing a record high.

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