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Macro Macchiato 25/02/19: Memorandum of Misunderstanding

The soap opera that is China-US trade negotiations presented an enjoyable sub-plot over the weekend as US Trade Representative Robert Lighthizer and President Trump discussed the legal status of a Memorandum of Understanding. Mr Lighthizer has been preparing one as part of leading the discussions, but on live TV and in front of Chinese delegates, Mr Trump questioned the utility of an MOU preferring to go straight to a contract: “I don't like MOUs because they don't mean anything. To me they don't mean anything.” Mr Lighthizer fell into line immediately: “from now on we're not using the word Memorandum of Understanding anymore. We're going to use the term trade agreement, all right?”

Having cleared that up, Mr Trump announced that he will delay the USD 200 Bn of increased tariffs on Chinese imports to the US which was slated for 1st March. Via his Twitter account Mr Trump announced, “I am pleased to report that the U.S. has made substantial progress in our trade talks with China on important structural issues including intellectual property protection, technology transfer, agriculture, services, currency, and many other issues. As a result of these very productive talks, I will be delaying the U.S. increase in tariffs now scheduled for March 1. Assuming both sides make additional progress, we will be planning a Summit for President Xi and myself, at Mar-a-Lago, to conclude an agreement. A very good weekend for U.S. & China!”

Mr Trump has not indicated what the new deadline for the tariff increases will be. But Mr Lighthizer and his Chinese counterpart Liu He clearly need more time to complete such a wide-ranging economic agreement. It does appear that both sides want the deal. Mr Trump needs to fulfil a campaign promise to get the deal, while the Chinese don’t want to lose an important export market and are prepared to play for time by getting a deal that can anyway be renegotiated later with a future US administration. China is also keen to maintain currency stability the better to manage its trade positions globally.

The Chinese yuan has strengthened within its allocated trading band and will probably strengthen further if the trade news continues to be positive. Chinese equities have responded positively, with the CSI 300 Index improving by over 20% since its January low and adding 6% in trading today. US stock markets have reflect the sentiment with the S&P 500 increasing 5% in the last month and over 0.6% in early morning trading today. Even European stock markets are rising today as investors take heart. European politicians should be monitoring the US-China negotiations very carefully because a renegotiated trade settlement between the US and EU is the next item on Mr Lighthizer’s agenda as Mr Trump wants to see more Germans driving Cadillacs.

This is all good news for shipping if only indirectly. A stronger yuan lowers Chinese raw material importers’ costs which may support import demand for iron ore, coal, oil and gas. The stronger stock market increases corporate appetite for investment and improves returns for investors. The year to date has been notable for being quiet with stock brokers and investment bankers noting reduced deal flow. Commodity prices have been weak, while freight indices have been underperforming expectations and the Spring Festival / Chinese New Year has had its usual seasonal effect on global transport activity including shipping. Maybe now the coiled spring is ready to rebound.

The Take Away

The intensity of negotiations between the US and China suggests that both sides seek to conclude a deal. Global equity, commodity and commodity markets are responding positively to improving sentiment around the negotiations. After a moribund start to 2019, many of us are increasingly desperate to pan any nuggets of good news from the dross. A trans-Pacific trade agreement between the world’s two largest economies would be a great spark to light up damp markets.

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