WeeklyWatch – Trump’s trade deal
20 January 2020
US and China agree deal
Last week marked a key turning point in US-China relations, with the two countries signing a ‘phase one’ trade deal. The deal appeared to put trade negotiations on a new and more collaborative course – the first time such a tangible turn has been taken since the Trump era. Despite publications such as the New Yorker dubbing the deal “an uneasy truce”, investors were certainly happy to chalk it up as positive news in the short term, as it helped the S&P 500 and the Nasdaq indices to yet more record highs.
Alistair Thompson of FSSA Investment Managers, Manager of the St. James’s Place Asia Pacific fund, commented:
“We see any actions which ease political tensions and facilitate free trade as a positive and, whilst we focus on bottom-up stock selection rather than attempting to predict changes in political sentiment, this helps to address a potential headwind for one of our most important markets.”
The deal is unique as it has been disintermediated – the World Trade Organization (WTO) was dropped as arbiter in favour of a head-to-head bargaining process that weakens the supremacy of international institutions and international rules, and makes the US look stronger. When it came to the concessions, it was largely China conceding ground – it’s little wonder, then, that the White House was so pleased with the deal, while Beijing publicly expressed its doubts.
However, the challenge for China is very far from over – and the same goes for the WTO. Last week, the US, EU and Japan increased pressure on Beijing over what they perceive as state-sponsored capitalism. The joint statement called for a WTO ban on various forms of support and attempts to close perceived loopholes – the deal takes advantage of a WTO means of applying sanctions without gaining the support of all 164 members. Brussels has warned Beijing that the WTO could collapse if no progress is made.
US and Chinese administrations face significant political and economic challenges outside the realm of trade deals. Last week, formal impeachment proceedings opened in the US Senate against Donald Trump, on charges of abuse of power and obstruction of Congress. Trump is only the third President in US history to be subjected to such proceedings, and he also faces pressure over his approach to Iran.
Meanwhile, on the economic front, US consumer prices in December rose at their weakest pace in four months. Despite this, the Fed expressed confidence in the growth trajectory of the US economy, which it said was strong enough to preclude the need for interest rate cuts. The news was not happily received by Trump, who criticised: “We’re the number one [economy] and we have to pay for our money.”
When it comes to China, the renminbi rebounded as the deal approached, just as data showed export growth slowing to a three-year low. China’s retail spending and industrial output both showed significant hikes in data released last Friday, which boosted markets still further, not least in Europe, which is particularly reliant on Chinese consumer demand. Last week the Shanghai Composite struggled on the Chinese currency rise and lacklustre growth figures – which came in at just 6.1%, its lowest level in 29 years.
That said, it still fell within Beijing’s target range and last year’s numbers were undoubtedly hit by sagging business confidence, at least some of which may return in the wake of the US-China deal, and when the worst financial fallout of the African swine fever epidemic begins to recede, at least in China. Moreover, Chinese industrial production figures published on Friday suggested some fresh economic impetus and delivered both US and European stocks a boost late in the week.
Last week, James Murdoch took the surprising step of publicly criticising News Corp, his father Rupert Murdoch’s media organisation, for pushing phoney scepticism on climate change. This was in the same week that the UK weather service published a study (backed by NASA) showing that man-made climate change was the chief ingredient in what made the 2010s the warmest UK decade on record. The recent bushfires in Australia have particularly raised the ire of Murdoch Junior, given his father’s dominance of the news market in his home country.
In the UK, the FTSE 100 enjoyed a Friday bounce, banking some of the week’s positive news, but domestic signs were more mixed. The week opened with a disappointing GDP figure, and further details about retail sales (which have now undergone their longest contraction since records began) added to the worries as it wore on.
The ONS said that manufacturing fell 1.7% in November, while services were down 0.3% – services account for 80% of the UK economy. Construction’s 1.9% rise in the same period failed to outweigh the damage. UK inflation also slipped to a three-year low, pushing up market expectations of a quarter-point rate cut at the end of January to above 60%.
Capital Economics commented:
“A flurry of weak data this week has sent money markets into a tailspin. But we suspect that the MPC [which sets interest rates at the Bank of England] will just about look past the Brexit and election-related distortions and will probably hold off cutting interest rates.”
That raises the question of whether the news flow has overly weighed on stocks. What is more, with Brexit due at the end of the month and a Budget in the offing, many uncertainties remain – last week, the PM prevaricated over whether he would indeed secure a new EU-UK deal by the end of the year.
Talking of prevarication, and a key issue of the day is the controversial tapered annual allowance for pensions. The taper has come in for sustained criticism since it was introduced in 2016, as it adds significant complexity to retirement planning for higher-earners. Last week, the British Medical Association suggested a review is “underway”, with the findings due for publication in the Budget on 11 March.
The ‘tapered annual allowance’ is a measure introduced by former Chancellor George Osborne in 2016 to gradually limit the amount of pension tax relief that can be claimed by high earners. This has led to thousands being hit with an unwelcome tax charge.
The taper means that those with incomes of more than £110,000 could have their annual tax-free pension savings allowance cut from £40,000 to as little as £10,000. The government came under more pressure recently, when it was revealed that NHS doctors were turning down overtime to avoid triggering a tax charge.
The Tory manifesto pledged to fix the problem for doctors’ pensions, and the Treasury is reportedly considering raising the threshold income for the tapered annual allowance from £110,000 to £150,000. However, experts say this would not remove the complexity of the taper and argue that any changes should apply to all higher-earners, not just one group of public sector employees.
Claire Trott, Head of Pensions Strategy at St. James’s Place, commented:
“The taper is a problem for many, and impacts not only high-earners, but those who may fall into the threshold in the future. Without expert help, the average person would struggle to apply the taper correctly and get their tax relief right.”
In the Picture
Is this the longest US expansion in history? The below figures seem to suggest so. When the current growth run began, the US had just come out of a crisis, and the Fed may have been offering all the help it can muster ever since, but the past decade of US growth is remarkable all the same!
The chart below shows the 10 longest periods of economic expansion in US history.
The Last Word
Chinese thinkers [through history] developed strategic thought that placed a premium on victory through psychological advantage and preached the avoidance of direct conflict.
– Henry Kissinger. As US Secretary of State, Kissinger oversaw the first rapprochement between the US and the People’s Republic of China.
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