U.S. - China Phase 1: More a Truce Than a Deal, but a Step in the Right Direction
December 18, 2019
On December 15 the U.S. and China stopped the “rock throwing” as no new tariffs were announced by either of the antagonists. And while there is no official deal in place and no formal agreement signed, this “truce” is clearly a good first step. With no new tariffs on the horizon and the uncertainty of new tariffs eliminated, we expect a reduction in risk premia and a corresponding rise in the value of risk assets.
The details of the Phase 1 deal still need to be worked out. The Office of the U.S. Trade Representative is seeking substantive reforms on Internet Protocol and Technology Transfer, transparency in China FX interventions and an opening of China agricultural to the U.S. But reform detail and the size of agricultural purchases have yet to be determined. The Phase 1 deal still requires legal review on both sides, but we expect something to be signed over the next few months.
While tariffs have in fact been lowered, they have also been left in place as serious distrust continues to exist between the two superpowers. Here are a couple of key takeaways for the market:
In short, we find the truce quite positive and expect an official deal signed within the new few months.
An unrelated thought on Brexit
We know that Boris Johnson was re-elected Prime Minister of United Kingdom with a significant majority. What we don’t know is what exactly this means for Brexit.
Given the current timetable, Johnson has until December 2020, exactly 11 months, to finalize a Brexit deal. We do not think that is enough time for a thorough deal, where the lack of clarity is a risk for UK businesses, and the economy slows as it prepares for the worst. In a word, this is bad.
The alternative is that Johnson “buys time” by being granted an extension thru 2022 (provided he pays his transfers to the EU by June 2020). This may allow for a smoother transition and keep businesses in jolly-good spirits. In another word, good.
It is our opinion that both Johnson and his party want positive fiscal and economic outcomes, and that he does in fact negotiate for an extension. While this is a positive, uncertainty will be particularly high during negotiations in the first half of 2020. Johnson will have to navigate treacherous waters, even within his own party, with numerous hazards and where wrong turns might be inevitable.
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