Trouble ahead? Tensions rise in US/China trade dispute

This month saw the imposition of 25% US tariffs on $34bn of imports from China, with US duties on another $16bn of Chinese goods to be added following a consultation period. As yet, initial direct economic impact from these tariffs appears minimal. Metal exports to the US are less than 3% of total exports even for Canada and Mexico, while for China, the latest levies are expected to knock only c.0.1-0.2% off GDP growth. However, Trump’s threat of tariffs on an additional $200bn of Chinese imports could have more material consequences for growth and ‘risk’ appetite.

The US and China are predominantly domestically driven economies (exports are only 10% of GDP in the US and 20% of GDP in China), but for China, this exogenous headwind compounds the policy induced economic slowdown attributable to Beijing’s deleveraging focus. Moreover, while China’s manufacturing PMIs continue to reflect growth, new export PMIs pointed to weaker trade momentum even before the latest round of tariffs. Beijing’s policymakers have begun to respond, with the People’s Bank of China (PBoC) offering rhetorical support to the renminbi, and recent targeted reserve requirement ratio cuts for major banks indicating a more nuanced approach to deleveraging.

US-China tensions (both economic and geopolitical) are likely to become a more permanent feature of the investment backdrop, as the market is now beginning to price. Despite last month reducing its sectoral “negative list”, China remains particularly restrictive and selective when it comes to foreign direct investment and President Xi’s flagship “Made in China 2025” policy appears to have piqued both sides of the US political establishment to the limitations of “constructive engagement” and the challenge China poses.

Trevor Holder – portfolio manager. Newton, a BNY Mellon company

This month saw the imposition of 25% US tariffs on $34bn of imports from China, with US duties on another $16bn of Chinese goods to be added following a consultation period. As yet, initial direct economic impact from these tariffs appears minimal. Metal exports to the US are less than 3% of total exports even for Canada and Mexico, while … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
MarketEye: Why Trump’s popularity is up c.5% since start of the year

Defined as an ideological movement that says citizens are being disadvantaged and mistreated by a small group of privileged elite, it is easy to see why populism has been on the rise.

In the US, real wages for middle- and low-wage earners have been stagnant for more than a decade, yet the top 5% of earners have experienced a significant increase over the same period. If you see a neighbour that is doing really well and you feel you are struggling then that is when people tend to get dissatisfied.

This period has also coincided with the post-financial crisis recession and the slowest recovery from a recession in close to 100 years. Populism was seen as one of the key drivers behind the election of President Donald Trump in November 2016, but it is not solely the US that has seen it rise. Changes in the type of manifesto individuals are elected on can bring changes in policy, which in turn has an impact on stock markets.

Now we have a ‘populist’ president and he has different policies and methods of communicating with the electorate. He is seen as controversial, but despite his style and approach, he has been successful in terms of getting some of his key policies enacted. Apart from Obamacare reform, he has succeeded in lowering the corporate tax rate, allowing US companies to repatriate earnings at a low tax rate, and commencing regulatory reform.

We view the majority of his headline policies as pro-growth and pro-business and therefore see opportunities in the US equity market.

Chuck Cook – portfolio strategist. BNY Mellon Asset Management North America 

Defined as an ideological movement that says citizens are being disadvantaged and mistreated by a small group of privileged elite, it is easy to see why populism has been on the rise. In the US, real wages for middle- and low-wage earners have been stagnant for more than a decade, yet the top 5% of earners have experienced a significant … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Who wins a trade war?

Trade wars are not won by anyone. Of course, the exporting country loses from a trade war, but so too does the importing one. The reason why there are no winners in a trade war is because it normally leads to the substitution of more expensive goods for cheaper ones. In effect, a trade war denies consumers the efficiency gains that have been realised through the expansion of global supply chains and one only has to go back as recently as 2002, the last time steel tariffs were enacted, to see the potential for damage. Following a spate of mill closures and surging imports, President Bush implemented tariffs on certain steel products. The net effect on employment in the steel industry was minimal, but the businesses that used steel products as inputs shed approximately 200,000 jobs (compared to the 180,000 employed in US steel production at the time).[1]. As a result of these tariffs, US manufacturing firms, in particular smaller companies, were subjected to higher input prices which eroded profitability. Unable to increase prices, once profitable companies were forced to cut production and with it their labour forces, so while the intention of tariffs and trade barriers is to repatriate jobs seen to have been lost overseas, the outcome is often higher prices and jobs losses at home.

Brendan Mulhern – Global Strategist. Newton, a BNY Mellon company

[1]Trade Partnership Worldwide study. The Unintended Consequences of U.S. Steel Import Tariffs: A Quantification of the Impact During 2002 07 February 2003.

Trade wars are not won by anyone. Of course, the exporting country loses from a trade war, but so too does the importing one. The reason why there are no winners in a trade war is because it normally leads to the substitution of more expensive goods for cheaper ones. In effect, a trade war denies consumers the efficiency gains … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
A parting of ways for the US and Europe?

An uptick in Eurozone economic data as well as relative political stability are among the factors most likely to drive a wedge between the performance of the US and European economic blocs in coming months. Recent PMI readings in Europe were far better than expected, with some modest semblance of inflation coming back into the system. The ECB acknowledged as much when at the end of June its President Mario Draghi said the European economy is on the cusp of transitioning from deflation toward reflation.

Meanwhile, other lead indicators in Europe, including GDP growth and earnings revisions, continue to improve driven by cyclical sectors. Despite the recent pullback in oil and commodity prices, cyclical sectors like consumer discretionary and materials have seen strong year-over-year earnings trends as underlying commodity prices remain higher than 12-18 months ago.

Mark Bogar – The Boston Company, a BNY Mellon company

An uptick in Eurozone economic data as well as relative political stability are among the factors most likely to drive a wedge between the performance of the US and European economic blocs in coming months. Recent PMI readings in Europe were far better than expected, with some modest semblance of inflation coming back into the system. The ECB acknowledged as … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
The chart that tells the truth about US growth and its importance

The three largest economic areas in the world are growing: China, the US and Europe. They are growing at different rates but compared with last year when people were really concerned about Chinese growth disintegrating and the lack of growth in Europe the trends are improving.

While the US still contributes the largest amount to global GDP growth, the phrase “when the US sneezes the rest of the world catches a cold” is nowhere near as relevant as it was a few years ago.

The emergence of China and some other emerging economies is significantly more important in terms of global trade and global growth, particularly for investors interested in emerging markets (EM). Elsewhere in EM, India certainly doesn’t have the economic heft or weight of China but it is growing at a rapid rate and other countries are also showing an improved rate of growth compared with the past couple of years.

Colm McDonagh- Insight, a BNY Mellon Company

The three largest economic areas in the world are growing: China, the US and Europe. They are growing at different rates but compared with last year when people were really concerned about Chinese growth disintegrating and the lack of growth in Europe the trends are improving. While the US still contributes the largest amount to global GDP growth, the phrase … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
US rates – raise, hold or bust?

Recent volatility has been driven by Greece-related events, but we expect the focus will soon shift towards expectations related to the US Federal Reserve (Fed) and whether they will begin their interest rate hiking cycle in September.

We note US economic data is continuing to strengthen as we head into Q3, with jobs, wages and inflation all showing positive signs. Based on the strength of the labour market and our expectation of rising core inflation in the second half of the year, we believe the Federal Reserve will hike short-term interest rates by 25-50 basis points between its September and December 2015 meetings. At present, the Fed funds futures market is pricing in less than a 50% probability of a September rate hike and about a 38% probability of two rate hikes in 2015.

In the short-term we expect this to create some volatility and distortions in asset classes such as credit and emerging markets debt and we look to maintain headroom to take advantage of opportunities in this space.

Raman Srivastava – Standish, a BNY Mellon company

Recent volatility has been driven by Greece-related events, but we expect the focus will soon shift towards expectations related to the US Federal Reserve (Fed) and whether they will begin their interest rate hiking cycle in September. We note US economic data is continuing to strengthen as we head into Q3, with jobs, wages and inflation all showing positive signs. … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Investment opportunities from crumbling US roads

In the US a lot of road and bridge infrastructure is paid for through the Highway Trust Fund (HTF). This is funded at the Federal level through the Gas Tax, which has been 18.3 cents per gallon of gasoline since President Clinton’s administration in 1993. This means the Federal component of the HTF has not adjusted for inflation in over 20 years. It has been suggested that with the oil price rolling over, as it has in the past six months, now would be a good time to raise the Gas Tax because it wouldn’t be felt as much by consumers.

The trouble is it would be a politically unpopular move. There will always be roads in need of repair and it would be economically positive to repair those roads but the benefits are not seen on day one. The lack of political will to address this issue has led to a significant funding gap, which has not been helped by the leveling off in miles driven and the increase in fuel efficiency of vehicles – leading to a lower consumption of gasoline. President Obama’s latest suggestion to implement a 14% one-time tax grab on US$2 trillion of overseas earnings could raise US$238bn from US companies. But even if it is passed this will not be a cure-all. The American Society of Civil Engineers assigned a grade of D+ to US infrastructure in 2013 noting an estimated US$3.6 trillion of investments are needed by 2020 to get infrastructure systems to a state of good repair. Private companies will increasingly step in to fill this void – stumping up the original capital to fund the project and then recouping this (plus some) through tolls.

James Lydotes – The Boston Company Asset Management, A BNY Mellon company

In the US a lot of road and bridge infrastructure is paid for through the Highway Trust Fund (HTF). This is funded at the Federal level through the Gas Tax, which has been 18.3 cents per gallon of gasoline since President Clinton’s administration in 1993. This means the Federal component of the HTF has not adjusted for inflation in over … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Is the dollar strength positive or negative for consumer staples?

Overall, third-quarter earnings season for the consumer staples sector has remained largely underwhelming, consistent with its recent past. But several management teams have backed away from their bearish stance and begun to speak constructively about the US for the first time since the financial crisis. The strengthening dollar has been a double-edged sword for many consumer staples companies in the quarter, though. Many of them took a 5-7% haircut to reported earnings because of currency translation, and based on recent spot prices, they may take another 5% hit next year. There is potential upside, however: A stronger US dollar usually means declining commodity prices, which are a positive for the group.

 

David Sealy, The Boston Company

 

 

Overall, third-quarter earnings season for the consumer staples sector has remained largely underwhelming, consistent with its recent past. But several management teams have backed away from their bearish stance and begun to speak constructively about the US for the first time since the financial crisis. The strengthening dollar has been a double-edged sword for many consumer staples companies in the … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Sentiment v reality?

US HY a crowded trade, according to Fund Manager survey

For a little while now our view has been that high yield as an asset class is expensive. To the extent we own high yield we have been very selectively buying credits where we like the fundamentals and short-dated issuance where there is high certainty over cash flows. As a sign of weakness, new issues have been coming to market priced to perfection and aftermarket performance has been poor in many instances despite high levels of oversubscription. Now investor flows have turned negative too, especially in the US.

– Adam Mossakowski, fund manager, Insight Strategic Bond Fund

For a little while now our view has been that high yield as an asset class is expensive. To the extent we own high yield we have been very selectively buying credits where we like the fundamentals and short-dated issuance where there is high certainty over cash flows. As a sign of weakness, new issues have been coming to market … read more

  • Download
  • Print
0 comments | Join the conversation, comment now