The strong start to the year for markets has been based on policy makers hitting pause on two fronts: trade and interest-rates and markets appear to have fully discounted the pause in monetary policy tightening (interest-rates). Therefore, it is likely that the next six months will be determined by the outcome of the three ‘clubs’ the market is juggling: trade, Chinese stimulus and Brexit.
Next week China’s top economic official, Liu He, visits Washington to meet Robert Lighthizer, the US trade representative, and the rest of Donald Trump’s negotiating team. After the visit both sides will have one month left to strike a deal or face an escalation of tariffs. Short term measures that help improve the trade balance between the two countries are easy to agree by the Chinese but there are three categories of structural issues which will be trickier for the Chinese to concede on. The first is technology transfers: the US believes that China is plundering US technological innovations. The second is economic discrimination: the US believes that the Chinese market is favours Chinese companies over American ones. The third is Chinese government support: the US wants China to slash subsidies to domestic industries across a wide range of sectors. For markets to sustain the hope of a trade deal, investors need to see the progress made on the trade pin.
Hardly a week goes by without the Chinese authorities announcing new measures to help the economy and this week was no different. Last night the Chinese central bank announced measures which should help inject liquidity into the Chinese economy. Investors will have noticed that this news supported the rally in equities on Friday. However, at some point the stimulus has to show up in hard data and until that happens concerns on Chinese growth will linger.
This week there was movement in the Brexit debate, which caused the pound to rally above 1.30 against the US Dollar and above 1.15 against the Euro. On Monday an amendment was tabled by two backbenchers – Yvette Copper (Labour) and Nick Boles (Conservative). This amendment seeks to prevent the UK leaving the EU without a deal should Theresa May’s revised deal be rejected by MP’s. The passage of the Cooper amendment, which is voted on next Tuesday, would be a big step towards averting a no-deal outcome.