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Dr Chan: First Sign Of Possible Trade War Thaw

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Over the Chinese New Year Holiday, US President Trump delivered his State of the Union (SOTU) address to Congress. His speech, in essence, was a campaign for his re-election bid in 2020. To rally US voters, Trump chose the slogan “Choosing Greatness” and criticised China for taking advantage of the US on trade matters in the past. However, Trump’s rhetoric was rather controlled and he blamed his predecessor Obama for allowing the US-China trade deficit to widen under his nose.

As the US stock market rallied post-SOTU, Trump announced that “there will be no trade deal” before he meets with Chinese President Xi Jinping. Trump had initially planned to meet Xi immediately after he meets North Korea Supreme Leader Kim Jong-un in the second summit scheduled to be held in Vietnam at the end of February.

However, Trump later announced that the meeting with Xi would not be possible before the trade truce deadline. As a result, the US market began to sell-off, as investors pondered on whether Xi is ready to make a deal with Trump instead.

During the visit by Chinese Vice-Premier Liu He to the US, there were few concrete details of any major breakthroughs in trade differences between the two largest economies. To pressure his Chinese counterpart, Trump pushed for Xi to meet before the deadline and agree to a deal. In the midst of negotiations, Trump also deliberately disclosed information about the concessions made by Liu He and his delegation.

In a turn of events, Xi did not agree to meet Trump by the deadline. This was to test Trump’s resolve of imposing 25 percent tariffs on all Chinese goods. No doubt it would hurt the Chinese economy, but Trump would also risk hurting the US economy and hence jeopardise his political standing.

Notwithstanding that, many products that Americans enjoy in their daily lives are manufactured in China. That also includes American brands, like Apple’s iPhone, which will not escape a blanket tariff. In such a case, Americans may have to fly to Hong Kong to purchase Apple products to circumvent the tariffs. And so, Xi is calling bluff!

In recent weeks, Xi laid out the “Six Priorities” as the framework for the Chinese government to work on. The top priority would be none other than to cushion the Chinese economy and stabilise employment in face of US confrontation. If China’s exports were to be severely impacted by US tariffs, the Chinese government may once again unleash another huge infrastructure stimulus package akin to the RMB4 trillion package announced a decade ago.

In reality, it would be naive to think that China would bend backwards by the mere threat of a blanket tariff on Chinese goods. If it was that simple, why would former US Presidents like Obama or Clinton leave the glory for Trump alone?

Fortunately, there is still hope for a resolution since both parties are still engaged in negotiations. In the next few days, US officials are also scheduled to visit China for next round of talks while Trump has suggested his consideration of letting the tariff “deadline slide”, in a sign of goodwill. This also revealed Trump’s reluctance in imposing a blanket tariff on Chinese imports.

On 30 January 2019, the Federal Reserve decided to leave interest rates unchanged after the FOMC meeting. However, the news was already priced in as the market had already anticipated that decision. Yet, the US stock market still surged as the Fed’s guidance took an unexpected dovish turn.

Recall in December last year, the Fed hiked interest rate and further guided to two more hikes in 2019, reasoning that a robust US economy calls for higher interest rate to curb inflation. However, the news sparked a rout in the US stock market all through till the Christmas Holidays.

However, a month later, the Fed’s January guidance suggested that interest rate hikes could take a pause till at least March 2019. Putting things in perspective, the sudden change of events also meant that the Fed is starting to see hiccups in the US economic outlook. But is the US economy at risk of a severe slowdown?

On 31 January, a day after the FOMC meeting, US officials released a set of upbeat job data which showed a significant increase of 300,000 new jobs. Such a crucial economic data would not have escaped the ears of the Fed. Why the sudden “dovishness”?

As I have mentioned repeatedly before, the Fed tends to cut interest rates in the third year of a new presidency. This is to allow continuity of a more robust economy, and thereby “aiding” the US President to secure his second term during election year. As witnessed over the past month, more and more Fed members have abandoned their hawkish stance.

Renowned financial data provider Bloomberg will reportedly add Renminbi-denominated government bonds and central bank securities to the Bloomberg Barclays Global Aggregate index in April this year. Addition of these securities will be phased in over a 20-month period.

Since March last year, many global fund providers have already indicated their interest of including these securities. However, several planned operational reforms are required to be implemented by the People’s Bank of China, the Ministry of Finance and the State Tax Administration in order for the inclusion to happen.

After several months of negotiations, the required implementations are finally completed. China’s inclusion into Bloomberg’s Global Aggregate Index is said to represent six percent of a US$54 trillion index upon completion of the phase-in. After which, the Renminbi-denominated securities will be the fourth largest currency component, after the US Dollar, Euro Dollar and Japanese Yen.

Part of the ongoing US-China trade talks would likely entail some kind of reforms to allow for more foreign access to China’s financial market. In reality, China has all along planned to open up its financial market but the trade war merely hastened the schedule. Nonetheless, introducing more competition to its financial market would improve efficiency to also benefit China.

On the local front, Singapore’s stock market performance has been underperforming Hong Kong and the US. This is because of deteriorating bilateral relation with our neighbour Malaysia, which is weighing on investors’ sentiments.

With the earnings season ramping up to full gear, stocks’ performance will be dictated by individual corporate results. As usual, there would be higher levels of speculation during this period. Positive earnings news might not trigger a rally as prices have already been bid up by speculators. On the contrary, if results were worse than expected, speculators would dump their position, causing the stock prices to fall dramatically.

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