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Macroeconomics

14 August 2019

Did Political Leaders panic yesterday ? 

Yesterday, President Trump surprised the markets, yet again, by announcing that the new batch of tariffs on Chinese goods will be postponed to mid-December for a number of products because of the end-of-the-year shopping season.

He also stated that China is about to do something ‘dramatic’ regarding trade. Whether that will be a big concession remains to be seen, but the Chinese declared they are still intent on holding September trade negotiations with the US. The markets got a shot in the arm and material sector stocks, which had taken a particular pounding, rebounded strongly.

This was another surprise for the markets, but perhaps it marks the beginning of a change in US behaviour towards China. After all, you cannot disregard the possibility that President Trump is acknowledging the slowdown in the US and wants to avert additional slippage. The US consumer needs to be protected if he wants to keep the economy going. Needless to say that going into the 2020 elections he wants a strong track record on the economy and the stock exchange. In China, President Xi also prefers to avoid additional economic hardship.This morning’s July activity data suggest things are not improving in China.

Turn to Germany and we get more of the same. This morning’s second-quarter GDP growth figure confirmed the -0.1% fall which was expected. Yesterday, the ZEW data already hinted at more troubles ahead. According to an ING study, the German economy has been standing still since the third quarter of 2018, as growth has averaged nil ever since. Just perhaps, finally, it is dawning upon politicians that action needs to be taken. Chancellor Merkel noted that she might react depending on the situation, whatever that means. Late last week the scrapping of the Solidarity Tax for East Germany was discussed.

The saying in the markets goes that when central bankers and/or politicians panic, investors need to step back into the markets. Too soon to tell? The signs from both the US and Germany seem to suggest that some measures to prop up the economy might be at hand. But it all seems very erratic and chaotic. Trump’s tweets can change direction any minute. And who knows how much harm has already been done to the global economy?

All in all, this complicates trading activity in financial markets. Traders are wrong-footed all the time. Volatility will only rise in such an environment. Being sidelined might simply be the best solution. Time will tell.