U.S./China trade talks recommence following G20 truce

The themes of the trade talks between Beijing and Washington remain the same despite the much-vaunted truce announced by Presidents Trump and Xi at the weekends G20.

Trump continues to complain about how America has been treated by its trading partners particularly in the area of currency manipulation. In his latest comment on the talks, which recommenced yesterday, he said that any deal that is reached must be “somewhat tilted in favour of the U.S.”

And, therein lies the problem that will continue to dog these negotiations.

China needs to be incentivised to allow the U.S. greater access to its markets, which is at the centre of the discussions. The circle of China exporting to the U.S., then lending the money to Washington to pay for the goods which then leads to more exports and more bond purchases is well established.

Since the “stick“ of the “Huawei ploy” seems to have failed, access to Chinese markets for U.S. firms looks to be a long and bumpy road. It may be that although new tariffs won’t be introduced, the “carrot” of reducing or removing altogether some of the existing tariffs may be necessary.

The dollar reacted positively to the news yesterday as market optimism over Fed action was dented by the reduction in the supposed need for economic stimulation. The index rallied to a high of 96.87 and has now retraced 50% of its fall following the Fed meeting. It closed at 96.83 and has barely moved from that level overnight.

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UK economy has issues other than Brexit

It is easy to make the argument that all the issues facing the UK economy stem from the decision to depart the EU and the ramifications of that departure being without a deal. However, the UK is far from immune from the issues facing the global economy despite the slightly brighter outlook for trade following this weekend’s G20. Domestic order flow within the UK is down and consumer lending very weak in June.

The most recent estimates from the Bank of England put growth at zero for the second quarter but analysts now believe that the economy may have contracted by 0.2%. The double whammy of Brexit and the global slowdown are affecting the economy almost in equal measure.

At yesterday’s “hustings” between Prime Ministerial Candidates Boris Johnson and Jeremy Hunt there was a significant difference of opinion over the financial effect of a no deal Brexit. Hunt believes that the entire Brexit “war chest” would be swallowed up by no deal. Conversely. Johnson believes that the effect would be “very very small”. He says he has a carefully costed plan to cope with no deal and believed his spending plans still have twenty-five billion pounds of headroom.

As we have seen many times over the course of Brexit, the truth is most likely somewhere between the two although financial markets clearly favour the Hunt definition of the costs.

The pound again appeared to arrest its now long-standing slide versus the single currency yesterday, rallying to 1.1205 and closing at 1.1199. During its precipitous fall from a high of 1.1780 on May 6th, Sterling established a clear pattern that any rally only lasts two sessions. Since it also climbed a little on Friday it will be interesting to see if that pattern remains today. So far it has, with a lower opening in Asia. Versus the dollar, the pound had a reaction to the greenback’s renewed strength as did all G7 currencies. It fell to a low of 1.2631, closing at 1.2640.

EU political mess following the economy

One of the more obvious effects of the more fragmented European Parliament following elections in May was the likelihood of a more difficult decision-making landscape.

So it has proved at the first attempt.

The election of five candidates for the most powerful jobs is proving to be “difficult”. The European Council meeting, which has been going on now for three days, is a perfect example of the effect of commissions, councils, and committees on the decision-making process.

The post of EU Commission president is currently held by Jean-Claude Junker and the candidates to replace him are a Liberal Dane, a Centre-Left Dutchman, and a Centre-Right German.

The German, Manfred Weber, is heavily supported by Angela Merkel who even forsook supporting the Bundesbank President Jens Weidmann in his candidacy for the ECB President’s position to ensure the election of Herr Weber.

The Dutchman, Frans Timmermans, was apparently ahead in the polls, but his candidacy has now been vetoed by Italy and some ex-communist eastern states. This is likely to be a story that will run and run since consensus looks a long way away.

The economy continues to provide signs that it is bottoming out. German unemployment fell by 1k having risen by 60k in May. Manufacturing output in the Eurozone’s largest economy improved but not by as much as the market had been expecting (hoping for).

In the wider Eurozone, the picture was much the same. Manufacturing output fell by 0.1 from 47.5 to 47.6, while unemployment fell from 7.6% to 7.5%.

The euro fell as a result of the stronger dollar despite the fact that the trade truce will be positive for the region longer-term. It made a low of 1.1281 versus the dollar, closing at 1.1285.