February 26, 2019— Two nights ago, President Trump indicated in a Twitter post that he would be extending the deadline for an escalation of tariffs on Chinese exports to the U.S. There were no details on how long the deadline would extend, but the message was clear: President Trump is keen to get a deal with China. This is a critical development as it delays an action that would have exacerbated the ongoing slowdown in both economies, and also sharply increases the likelihood of an eventual deal that will preclude any further escalation.
Since December, when the tariff deadline was initially pushed out, it became more apparent to us that the Trump administration wants a trade deal with China. Not only is it clearly in both countries’ economic interests to avoid an escalation of tariffs, but it would be particularly helpful at this time for the Trump administration to claim victory on a key campaign issue. At this point, it looks unlikely that tariffs will be escalated from 10% to 25% on the $200 billion of Chinese exports to the U.S. The prospects of that escalation, combined with the prospect of retaliation by China which would trigger yet another (third) round of tariffs by the U.S., has been the largest overhang on economic uncertainty and markets for the past six months. Trump’s Sunday night tweets, then, are a signal that the market’s worst fears will likely not be realized.
Trade representatives on both sides made positive, if not concrete, statements about the progress of talks. No language has been released but there have been multiple media stories about China pledging to sharply increase purchases of U.S.-made goods. There has been far less reported on how China may satisfy U.S. demands to stop requirements for U.S. companies to form joint ventures and to stop the appropriation of intellectual property. But there are signs that the Chinese government has already been moving to loosen those restrictions in recent months. China’s support of large state-owned enterprises (SOEs) appears to be a major, remaining sticking point. Nevertheless, statements from both sides point toward continued progress as opposed to a stalemate.
U.S. equities responded to the news positively, but not significantly so. China’s local markets, on the other hand, surged. From our vantage point, the lack of a robust response in U.S. equities is because the market had likely already priced in avoidance of higher tariffs between the U.S. and China. However, there could be additional upside to the market if existing tariffs were lifted, as we would expect this to signal that the worst of the trade uncertainty is behind us. While the economic impact of existing tariffs already in place is debatable, a complete lifting of the veil of trade uncertainty would likely improve business confidence and possibly boost firms’ capital expenditure plans. A trade deal could come at a time when green shoots are appearing in Chinese economic data, which could mean the trough in global economic growth is behind us.
It is worth a note of caution that we are not totally out of the woods with trade. There has been significant focus on U.S.–China trade negotiations, but this is just one of many global trade issues. If the Trump administration is able to achieve a deal with China, they will likely be encouraged by their tariff strategy and could shift to applying tariff pressure on European autos. The U.S. and Europe do more bilateral trade than China, so a trade war between the U.S. and Europe could be damaging. It would also hit a region (Europe) and a sector of the economy (autos) that are extremely fragile right now. The European economy is already flirting with recession, and tariffs could put them over the edge.
We are encouraged by the U.S.–China trade progress, and we feel there is some upside in terms of the market pricing out a trade war. The critical point for markets is not the quality of any deal with China, but the fact that a deal will almost certainly remove the threat of further tariffs and could eventually remove the existing ones. Positive spillover effects to business confidence and capex intentions could result in a slight reacceleration of global growth, which would be bullish for global equities. However, we remain guarded on some important issues outstanding, including European auto tariffs, the health of China’s economy, and the U.S. earnings backdrop. As a result, we are slightly overweight equities with a preference for the U.S. and emerging markets. In our view, now is not the time to get greedy and chase market returns, but we need to be carefully monitoring all incoming data to assess the durability of the current market strength.
Wilmington Trust is a registered service mark. Wilmington Trust Corporation is a wholly owned subsidiary of M&T Bank Corporation. Wilmington Trust Company, operating in Delaware only, Wilmington Trust, N.A., M&T Bank and certain other affiliates, provide various fiduciary and non-fiduciary services, including trustee, custodial, agency, investment management and other services. International corporate and institutional services are offered through Wilmington Trust Corporation’s international affiliates. Loans, credit cards, retail and business deposits, and other business and personal banking services and products are offered by M&T Bank, member FDIC. Wilmington Trust Investment Advisors, Inc. is an SEC-registered investment adviser providing investment management services to Wilmington Trust and M&T Bank affiliates and clients.
These materials are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of Wilmington Trust or M&T Bank who may provide or seek to provide financial services to entities referred to in this report. M&T Bank and Wilmington Trust have established information barriers between their various business groups. As a result, M&T Bank and Wilmington Trust do not disclose certain client relationships with, or compensation received from, such entities in their reports.
The information on Wilmington Wire has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The opinions, estimates, and projections constitute the judgment of Wilmington Trust and are subject to change without notice. This commentary is for information purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or a recommendation or determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the investor’s objectives, financial situation, and particular needs. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will succeed.
Any investment products discussed in this commentary are not insured by the FDIC or any other governmental agency, are not deposits of or other obligations of or guaranteed by M&T Bank, Wilmington Trust, or any other bank or entity, and are subject to risks, including a possible loss of the principal amount invested. Some investment products may be available only to certain “qualified investors”—that is, investors who meet certain income and/or investable assets thresholds. Past performance is no guarantee of future results. Investing involves risk and you may incur a profit or a loss.
Any positioning information provided does not include all positions that were taken in client accounts and may not be representative of current positioning. It should not be assumed that the positions described are or will be profitable or that positions taken in the future will be profitable or will equal the performance of those described. Positions described are illustrative and not intended as a recommendation outside of a managed account.
Indices are not available for direct investment. Investment in a security or strategy designed to replicate the performance of an index will incur expenses, such as management fees and transaction costs that would reduce returns.
Third-party trademarks and brands are the property of their respective owners.