No deadline for China trade deal

Equity markets in Europe and US futures were hit as Donald Trump upped the ante again on trade, warning that there is no deadline for doing a deal with China and that it’s probably be better to wait until 2020 and even after the November presidential election to agree terms. The chances of a deal by Dec 15^th just took another turn lower.

Markets simply aren’t priced for this; for a trade deal to be that far in the future – if one can even be struck at all. After weeks of making generally positive noises on a deal being very close, there is a real sense now that a deal is not so very near at all and markets need to reprice. Combined with the barrage of tariff threats on the EU, the comments can be taken as a sign that the White House has no qualms about levying further tariffs and is happy about using trade as a economic, political and diplomatic weapon.

Of course, Donald Trump’s shoot-from-the-hip comments in these kind of interviews need to be taken with a dose of salt – we could just as easily see him row back on this later, as has happened countless times already. We’re only ever a tweet away from saying that a deal is very close to see a rebound. However, it’s clear that hopes for even a skinny deal being done this year have diminished in the last two days and markets are reflecting this.

Meanwhile, France has promised a strong response to the plans to hit $2.4bn of French goods with 100% tariffs. It’s worth noting that while the chance of a meaningful escalation in EU-US trade spats – tit-for-tat tariff hikes – is relatively low, it’s clearly a risk.

Dow futures fell 100 points to test horizontal support at 27,660 and bouncing off that level to pare some losses, with the cash market eyeing an open down c90pts around 27690 as of send time. Meanwhile European markets were also hit, although the DAX remains in positive territory. The FTSE 100 is having a hard time, down more than 1%.

Tariffs are very much the talking point:

• The US government may levy a punitive tariff of up to 100% on $2.4 billion in imports from France, including cheese and Champagne (Christmas is cancelled). This is in retaliation for France’s digital services tax that targets the big US tech giants.
• The White House also threatened the EU with a fresh round of tariffs in relation to the Airbus case. Whilst the US has already slapped tariffs on $7.5bn of EU goods, the US trade representative threatened to go beyond that.
• Tariffs on imports of steel and aluminium from Brazil and Argentina will be re-imposed in retaliation for ‘massive devaluation’ of their currencies. Nonsense of course – quite clearly they couldn’t manipulate clay.
• Meanwhile no real signs of progress on that all-important phase one deal with China by Dec 15th, although the US may still kick that can down the road.

Probably three salient points in this to bear in mind.

• What we are seeing is the weaponization of trade and using it for diplomatic purposes. It is no coincidence that these announcements come as Trump lands in London for the Nato summit and a chance to demand European allies spend more on defence.
• It will also draw attention away from the Chinese talks, which clearly are not yielding the necessary outcome as far as the White House is concerned. US support for Hong Kong protesters has not helped build bridges and we have seen China retaliate in its own way. Beijing seems sensitive to conflating anything about Hong Kong with trade talks though.
• And, three, it’s a clear signal to Beijing that Trump is not shying away from tariffs – as he said yesterday – if there is no phase one deal the tariffs will go up.