US/China trade war is the only news story
|Outlook:
We get April existing home sales today, expected to bounce back by 2.7% after a 5% fall in March. But realistically, the only news story everyone cares about is the US-China trade war. The blacklisting of Huawei is a last straw or a point of no return, not least because of the insult factor.
An opinion piece in the FT says the ban on US companies supplying Huawei with chips is "damaging and ill-conceived." Yes, China has behaved badly by stealing technology and keeping big western companies out of China (think Google), but this development inspires the parallel development of a competing technology. The US should show by example that cooperating in a rules-based system is better.
Two things: "showing by example" has failed to work over two decades. China cheats. It's like an honor system in a vacation house or office kitchen. Somebody always steals the last of your milk (and puts the empty bottle back in the refrigerator). Second, the editorial fails to mention the face-saving aspect. The blacklist is an outright slap in the face for all the world to see. This is almost certainly more important than the mere business aspect of supply chains.
Meanwhile, the OECD is holding meetings and on the sidelines, the US, Europe and Japan are jabbering about how to deal with state subsidies. The WTO reports all but one of the top 100 Chinese publicly listed companies have a majority stake held by the Chinese government. Other state subsidy cases (Airbus, Boeing) pale by comparison. The Global Fund Manager Survey by BoA-ML acknowledges that the US-China trade war is the biggest "tail risk," meaning that if we are going to get a global recession, that will turn out to be the root cause. In a article, Heisenberg notes the survey estimates the levels of stock market decline that would trigger a Fed rate cut (the "Fed put"). We are shocked. See the chart. We shouldn't rush to be judgmental about political influence on the Fed. The 500 companies in the S&P import about 30% of their inputs. Heisenberg writes "Given that and given the impossibility of overhauling globalized supply chains overnight, it is a mathematical certainty that if these tariff escalations keep coming, profits will be lower, prices will be higher, or some combination of both.... In the medium term, higher tariffs imply reduced competition, lower productivity and inefficient distribution of resources – i.e., a negative supply shock." Golly, maybe global recession is not so far-fetched, after all. Elsewhere, we await contagion in the emerging markets... The Economist magazine mourns Argentina again having Cristina Fernandez de Kirchner on the political scene--she will run for Vice President in October. Turkey has long gone to hell in a handbasket. Various flare-ups appear from time to time but so far, no systemic failure. Just wait. In the end, there is no substitute for the dollar, whether risk aversion is high or higher, or low and lower. The euro is nice but only against the pound. What a world.
Tidbit: It's the beginning of the end... Yesterday a federal judge ruled the president cannot block a House committee subpoena that seeks Trump's financial records from his accounting firm. Moreover, the effort to block the subpoena is based on ridiculous assumptions that fly in the face of black-letter law (namely Article 1 of the Constitution) and recent history. The accounting firm has 7 days to obey, during which Trump will be feverishly appealing to a higher court. Tomorrow we get a ruling on another subpoena, this one to Deutsche Bank for not only the transaction documents but also the in-house reports on violation of money laundering and other violations of banking regulations (disclosed by the NYT yesterday). One lone Republican had read the Mueller report and says out loud that Trump committed impeachable offenses.
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