- U.S.-China update. While it is often said that no one wins in a trade war, in the off chance it escalates to that, the U.S. has a few important advantages. However, those advantages do not imply that the road to resolution will necessarily be easy, and China has a few bargaining chips of its own. We lay out several of each countries’ advantages below:
- Advantage U.S. Last year the U.S. exported $130 billion in goods to China, while China exported $505 billion in goods to the U.S. Consequently, China is going to run out of direct reprisals quickly should it look to match the U.S. in tariffs. There is also broad agreement globally that China engages in a range of unfair trade practices, which provides some moral high ground for the U.S. to demand concessions. President Trump’s base may have a fairly high pain tolerance if it believes in the president’s goals. Finally, President Trump’s trade stance makes threats credible that might be otherwise dismissed as unlikely, which solidifies his bargaining position.
- Advantage China. China’s president Xi doesn’t have to face reelection and U.S. mid-terms are around the corner, making the political pain of an extended trade dispute potentially higher in the U.S., and China is already targeting political pressure points. Also, China’s economic growth rate makes it a very attractive market for investment, and it could look to offset a drop in exports by limiting partnerships with U.S. companies. The tariffs are on China’s finished goods and are likely to have a ripple effect on U.S. allies like South Korea and Japan that supply many of the inputs, alleviating a source of potential added pressure on China. Last, while China is very unlikely to go with the “nuclear option” of dumping its large holding of Treasuries, tactical selling at politically opportune moments can provide added pressure points.
- Trade outlook. Tensions are clearly escalating and it’s difficult to measure the knock-on effects from an extended trade dispute, for example via higher prices and disruptions or delays in planned business investment. We still believe cooler heads will prevail, simply because it’s in all parties’ interest, and estimate the negative impact of the trade dispute will offset about a quarter of the positive impact of the stimulus, taking a bit out of the stimulus but still leaving an overwhelmingly positive net impact on the economy.
- Markets digest FED, ECB announcements. Markets took the moderate surprises from the Federal Reserve (Fed) and the European Central Bank (ECB) in stride last week. The Fed leaned hawkish and the ECB dovish, pushing rates in the two countries in opposite directions and flattening the U.S. Treasury yield curve to its flattest level since August 2007. The move suggests investors may view the current Fed rate hike path as unsustainable. In this week’s Bond Market Perspectives, we delve into the reactions to last week’s central bank announcements and what they tell us about where markets may be headed.
Monitoring the Week Ahead
- Current Account (Q1)
- Existing Home Sales (May)
- LEI (May)
- UK: BOE Rate Decision
- Eurozone: Consumer Confidence (Jun)
- Japan: CPI (May)
- Japan: Nikkei Mfg. PMI (Jun)
- Markit Mfg. PMI (Jun)
- France: GDP (Q1)
- France: Markit Mfg. PMI (Jun)
- Germany: Markit Mfg. PMI (Jun)
- Eurozone: Markit Mfg. PMI (Jun)
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All performance referenced is historical and is no guarantee of future results.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured. These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.
For Public Use – Tracking # 1-741701 (Exp. 6/19)