Since experiencing a significant slump in December, USA, European and Asian equity indices have made significant recoveries in 2019. The potential resolution, to the ongoing tariff driven trade war between the USA and China, has provided the calm to pour over the previously, highly inflammable and volatile markets.
But the current benign situation could be about to dramatically change, as severe tariffs on $200 billion of Chinese imports into the USA, are set to implemented by the Trump administration from March 2nd. That date is now beginning to light up on many investor’s radar (trading) screens. The renewed focus on the trade wars, was illuminated by Donald Trump recently cancelling any proposed meeting between himself and the Chinese premier, provisionally agreed for March 1st.
The USA is sending a delegation to China in an attempt to smooth the waters, but hopes are quickly fading that Trump will back down on his tariff decisions, despite the damage the proposal caused to equity markets in late 2018. As an example; the SPX came within 60 points of breaching 3,000 during the peak of optimism in 2018. Thereafter, during the trade war slump, the index slumped to circa, 2,350, entering technical correction territory. The year to date rise is circa 8%, however, the monthly growth has slipped to approximately 4%. And at circa 2,700, the current price of the index is still close on 10% below the all time high.
It’s impossible to imagine a scenario, whereby the impact of any further tariffs applied to $200b of Chinese imports, won’t severely hit various USA industrial sectors and U.S. equity indices. It’s also highly likely that the value of the dollar will come under intense scrutiny if these new tariffs are implemented. Yearly, USD has made considerable gains versus many of its peers; up 7.5% versus the euro, up 6.3% versus sterling, up 9.3% versus the Aussie dollar and up 7.3% versus yuan. The Fed’s interest rate, currently at 2.5%, is completely out of step with other major central banks’ monetary policies and the recent rate rises have increased the attraction of the greenback as a safe haven. But the rate rises have harmed Trump’s election programme, in 2016 he pledged to stimulate USA based manufacturers and exporters, through both fiscal and monetary policy stimuli.
In an ironic, counter intuitive twist to Trump’s tariff programme, the stronger dollar has made exports to China and elsewhere more expensive, and has done very little to alter the USA balance of trade deficit with China. Therefore, the proposal on the table; to encourage China to buy tens of billions of USA goods, in order to rebalance the huge trade deficit between the two countries of circa $500b, looks doomed, even before its implementation. Only an interest rate reduction, could alter the current economic status quo and if that’s put in place, imports will become more expensive, further harming the USA economy. According to the latest U.S. Census Bureau data, the U.S. currently runs a trade balance deficit of circa -$380b with China. Fixing that can’t be done by simplistically applying similar levels of tariffs on Chinese products, imported into the USA.
Whilst the USA-China issue will be increasingly discussed in the financial mainstream media over the coming weeks, once markets open on Monday, focus will quickly turn to the U.K. economy and the latest GDP growth figures, to be published by the ONS at 9:30am U.K. time. According to the Reuters forecasts, obtained after they’ve polled their panel of economists, the newly commissioned month on month figure will reveal zero (0.00%) growth for December, a month that traditionally enjoys a seasonal boost, due to retail spending.
The final quarter for 2018 Q4 is forecast to reveal growth of 0.3% resulting in annual growth of 1.4%. Alternative views are circulating amongst chief market analysts and economists on various discussion forums, that the U.K. growth for December may beat the forecast and come in at 0.1%-0.2%. However, alternative opinions aren’t ruling out negative growth for the month and over the first three months of 2019, once the first quarter is completed.
The latest GDP figures will accompany a raft of other key U.K. related data published by the ONS during the morning trading session of February 11th. The data releases will include: manufacturing and industrial production, consumption data, the latest services index data and import and export figures. Many analysts compare the official ONS data with the recently published, disappointing IHS Markit PMIs, in an attempt to determine patterns of economic performance. The overall trade balance figure for the U.K. in December, is forecast to reveal a growing deficit.
Naturally, the U.K. pound will come under intense scrutiny during Monday’s London-European trading session, especially whilst the Brexit impasse still exists. Sterling traders should pay attention to the series of data from the U.K. ONS, as it’s released from 9:30am U.K. time. GDP growth figures are some of the most closely watched for FX traders to make their trading decisions, as misses, or beats of the predictions, can generate significant volatility in the domestic currency the data relates to.
