US, China jawbone on trade, but markets aren’t taking the bait
In a remarkable show of restraint, markets have remained in the red despite positive noises on the prospect of reopening trade negotiations between Washington and Beijing.
US and Chinese officials are trying to sound positive on the odds their nations can reach an agreement on trade. It’s just the latest in a cycle of: sound positive > negotiate terms > back away from a deal > raise tariffs.
But this time around it seems markets are becoming wary of the rhetoric. Today, major indices are mostly in the red. Even the cautious optimism of yesterday’s early rise was quickly wiped out later in the New York session as traders thought twice about bidding up the major indices.
It could partly be exhaustion. The past month has seen the Dow gain or lose over 800 points in a single session on more than one occasion. 1,000 point swings are unusual, but not rare for the Hang Seng these days. Gold has seen movements in the region of 2%, while volatility for oil has produced swings of 5% in both directions.
The mystery phone call
On Monday, China’s top negotiator tried to calm fears ignited by Friday’s new tariff announcements. Vice Premier Liu He stated,
“We believe the trade war escalation is bad for China, bad for the United States and bad for the interest of the people in the world. We are willing to use a calm attitude to solve problems by negotiations and cooperation.”
Trump later claimed that “China called last night”, and strengthened the message by telling reporters at the G7 summit that “This is a very positive development for the world”. He later claimed “I think we’re going to make a deal”.
Asian markets trimmed losses and US and European stocks edged higher. But traders weren’t convinced.
Trump’s claim that there had been a phone conversation between officials from the US and China kept markets on the back foot. China’s Commerce Ministry declined to comment when asked by Reuters for confirmation that a call had taken place. While US Treasury Secretary Steven Mnuchin said the two sides had been in contact, editor of China’s state newspaper the Global Times, Hu Xijin, claimed that negotiators haven’t talked recently.
After being burned before, markets need something more concrete
It’s not that hard for an official to say that a trade war is bad and they don’t want one. Without confirmation of the key phone call, that’s all markets have to go on.
The major indices today are largely in the red, with the DAX heading towards a 1% loss and US futures pointing to a lower open. Traders clearly aren’t falling for the jawboning – if Trump or Beijing wants to calm market fears they’re going to have to offer up something a lot more solid.
As Trump-Xi prepare to meet, Beijing jabs at Washington
This G20 meeting might as well be the G2 this time around. The United States and China are the main topic, the two having hit economies across the globe with their trade dispute.
Markets have long been hoping that the gathering in Osaka might provide an opportunity for presidents Trump and Xi to meet and work through their differences. It was only a few days ago that state officials confirmed this was happening. Trump had previously dashed any hopes of a discussion.
But while Trump and Xi are preparing to meet to smooth things over, back in Beijing the rhetoric was still accusatory. Vice Commerce Minister Wang Shouwen stated that China wanted the US government to cease “inappropriate” actions against domestic companies.
Beijing hits back at US Commerce Department
On Friday the US Commerce Department blacklisted five Chinese companies from buying components made in the US. It already hit Huawei – the Chinese smartphone giant – which such a ban in May.
CNBC reported that Mr Wang, speaking in Mandarin, commented Monday that:
“We hope the US side, under the principles of free trade and the spirit of WTO principles, can cancel these inappropriate measures against Chinese companies, and remove them from the entity list. This has benefits for both sides.”
Markets are currently holding their breath, but today’s response from China is a good reminder that nothing has changed until the two leaders agree a deal.
We’ve been much closer to expecting a resolution before – there was even a deadline – only for things to worsen again. Trump and Xi are sure to make positive noises after their talk, and that will likely boost stocks, but behind their leaders, the governments of the US and China continue to throw punches.