Global markets continue to enjoy an overall boost in bullish sentiment as the final trading month of the year approaches. Trade negotiations between the US and China are in focus and the majority of market participants trade as markets as if the phase one trade deal is the solution to all global issues. This bullish confidence may be misplaced as other structural economic issues remain ignored. Where the consensus remains overly optimistic about 2020 and beyond, a repricing of major markets may be lurking in the background with smart money already betting on a market crash in the next three months.
Liu He and Robert Lighthizer Phone Call
A phone call between Liu He and Robert Lighthizer grabbed headlines today and was touted as another sign of progress. China’s Zhong Shan, Yi Gang, Ning Jizhe, and Steve Mnuchin out of the US joined the phone call. Both sides attempt to iron out differences that are currently preventing the phase one trade deal to be signed. Skepticism about the significance of this deal has emerged and doubts about a real trade deal have increased over the past few weeks.
The Chinese Ministry of Commerce stated after the phone call: “Both sides discussed resolving core issues of common concern, reached consensus on how to resolve related problems (and) agreed to stay in contact over remaining issues for a phase one agreement.” Chinese President Xi told a delegation of visiting US businesses that “China wants to work for a phase one agreement on the basis of mutual respect and equality. When necessary we will fight back but we have been working actively to try not to have a trade war.”
Tariffs Remain One Key Issue
One area where both sides disagree on is tariffs. China wants them removed as part of a trade deal where the US wants to keep them in place. US President Trump has noted several times that a fair trade deal is not acceptable to him. China may opt to get a phase one trade deal signed and then await the result of next year’s US presidential election as well as the ongoing impeachment proceedings. The Chinese Commerce Ministry added that “If both sides reach a phase one agreement, the level of tariff rollback will fully reflect the importance of the phase one agreement.”
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Fundamental Economic Issues Increase
The focus on the trade war resulted in many other developments flying under the radar. US consumer confidence continues to slide and posted its fourth monthly contraction in November. The US housing sector continues to struggle and is having an impact on consumer confidence. How this will play out during the key holiday shopping season, a few days away from officially starting in the US with Black Friday post the Thanksgiving holiday, remains to be seen.
Wage growth and the labor market, in general, has slowed down, the manufacturing sector is in a recession and regional economic indicators suggest that several are experiencing recessionary threats. The US Federal Reserve may feel forced to cut interest rates further, eroding the US Dollar and economic confidence with it. Bond markets have additionally started to reverse and yields are expanding, yields move opposite of prices. This all is reflected in weakening consumer confidence.
Consumer credit figures have also shown a severe decrease and once the consumer stops borrowing to support the US economy, a rapid slowdown may push it into a recession. Expectations for 2020 GDP have been revised lower and the US is set to underperform the global economy by a wide margin. Political uncertainty is adding to issues and debt is spiraling out of control. Everything seems to be heading for a cliff or falling apart all around the phase one trade deal that may be too little too late.
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