Episode 7: Upcoming UK election and the US/China trade deal

[00:00:04] Welcome to Before and After powered by Refinitiv, I am your host, Jamie McDonald. The after segment in this episode looks at the immediate reaction to the UK election. Our before segment deals with the upcoming deadline for a trade deal between the US and China. Perhaps deadline is too strong a word, suggested date is perhaps more appropriate as long as the markets are happy. Let's look closer in a deep dove before segment. 

[00:00:32] The looming deadline for a trade deal between the United States and China has been the dominant geopolitical theme for the last two years. And as the December 15 deadline for an agreement approaches, the markets deal with the specter of a new round of 15 percent tariffs on 160 billion dollars worth of Chinese goods. Negotiators have not reached a Phase 1 deal, but it could be struck at any moment (or not). And so we aren't concerned with the instant reaction in this case. But instead, we are looking at what could transpire over the coming weeks and months and what the markets and specific sectors will do given different outcomes. Most analysts believe the US plans to delay any additional tariffs while a deal is being discussed. President Trump threw markets into a momentary state of chaos last week when he suggested he has no timeline and perhaps a deal. Best wait until after the election. It's not the first time he has invoked a willingness to butt heads with China on trade as far back as June 2016. During the campaign, Trump laid out plans to counter unfair Chinese trade practices, saying China's entrance into the WTO enabled the greatest jobs theft in history. On March the 8th, 2018, he ordered the imposition of tariffs on all imported washing machines and solar panels, not just Chinese, all of them. One month later, he tacked on a whopping 25 percent tariff on steel imports and a 10 percent tariff on aluminum. Again, not China specific. China instantly retaliated with a 25 percent tariff on 128 U.S. products. Back and forth it continues to go. We now have 400 billion in tariffs on Chinese goods and over 150 billion on U.S. products. Then earlier this year, a glimmer of sanity from both sides. Trump and Xi expressed a willingness to resume talks and the market showed its willingness to believe in hope. Then protests in Hong Kong explode and the U.S. criticism of China's handling of the situation certainly has complicated the deal. Just ask the NBA how touchy the Chinese government can be on the mix of politics and business. So here we are, dueling tariffs, political criticism, huge gaps in negotiation positions, big world egos and a looming deadline. It all spells the end, no? Hold on. We didn't discuss Trump and Xi's shared obsession, market returns. And can you blame them? Who doesn't love market returns? We certainly do. We also have noticed that every time the market gets hammered, a PR love letter gets issued espousing commitment and progress towards an everlasting trade relationship. And with the S&P right around all time highs, Trump let loose with this on December 3rd. "I have no deadline. No. In some ways, I think it's better to wait until after the election with China. I'll tell you in some ways, I like the idea of waiting until after the election for the China deal. But they want to make a deal now and we'll see whether or not the deal is going to be right. It's gotta be right". The embodiment of the art of the deal. Or maybe with strong indicators like job numbers, Trump is content to sit back and let the US markets roll. Either way, we want to be prepared. The most likely scenario seems to be a last minute deal to keep the old tariffs, delay the new tariffs and agree to disagree for now. This makes sense as both sides want to appear that they are working hard on a resolution but have no desire to address the core issues of IP theft, currency manipulation, and China's issues with US involvement in Pan Asian politics. Given that this has happened before, we know that a delay is fine and that broadly speaking, the impacts so far are perhaps not as bad as assumed. The larger fear for market participants has always been the escalation potential, and this option diminishes that prospect. It does not appear that the new tariffs will be applied even if there is no deal in place. The consensus is the wheels would fall off and the markets would break down, should that happen. This belies a belief that all the Q3/Q4 gains are a result of the current resolution. Does that then mean that if the trade wars hadn't happened, the gains would be even greater? It's entirely possible that if the deadline were to pass, we'd get a short term correction. But a pullback for the year and rally or a full trend reversal is the key question. This scenario also comes with the expectation that this would result in a complete breakdown of any progress made by both sides. As China has agreed to buy more agriculture, one area which could see instant pain would be agricultural commodities such as soybeans, which have rallied 13 percent off trade war fear lows. You could expect those gains to be instantly tested. Lastly, and least likely at this stage, something no one is expecting, a comprehensive deal is announced. Euphoric risk on would ensue. But please don't hold your breath. Seriously. A year has passed and there is no trade deal, no clarity, and no resolution has emerged. And still the world economy has not been derailed. With that in mind, expect a much higher degree of investor resilience on any trade news disappointment this time around. 

[00:06:06] As we go live with this show, the United Kingdom is well into the counting process for its general election. The third one in four years. Although the pre-election polls were implying a Conservative Party majority, the gap had narrowed and the margin of error on those polls include the possibility of another hung parliament. By now, there may already be a good indication on the final result. And as we recorded this before the polls were closed, we're going to have to run with a few "what if" scenarios here. Exit polls will be released shortly after the voting has fully closed. They have proved to be a good indicator as in 2017 when they accurately predicted the results as a hung parliament. When all the pre-election polls had expected an outright conservative majority. If the British pound is attempting to rally further as we go live, then those exit polls and the first returns of the election itself are probably implying that the Conservatives have won a working majority. In fact, if it's clear cut, then a winner may be announced early on the morning of the 13th before the full counting has finished because just a few marginal and swing seats will actually decide the winner. But if the exit polls were close and there's no clear pattern from the earlier seats to have reported results, then the counting could push on well into the UK morning. The pound should be sagging back below 130 in this instance and maybe even back towards 126. But not to the lows, because a hung parliament just means yet more delays. Remember, there are 650 seats up for grabs. If a party gets three hundred and twenty six of them, then they're home and dry. For a fuller rundown, we'll have a deeper dove in next week's edition of Refinitiv's The Big Conversation. I'm Jamie McDonald. Thank you for watching. Before and after. Powered by Refinitiv. See you next episode.