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26 August 2019

No-Limit Trade War 

Just when you were hoping we might get a pause in geopolitical bickering, President Trump tweets another raft of market-unfriendly comments.

Obviously, as you might have had expected, he was very displeased with the Fed and with China last Friday, but observing a moment of restraint is simply not possible. The president seems obsessed with winning any battle he engages in. Today that seems to be a no-limit trade war leading to clear brinkmanship, putting the US economy at risk. In the tit-for-tat trade war, the president now wants US companies producing in China to return to the US. He has the legislative powers to force them. This implies Foreign Direct Investment in reverse, which would inflict losses on the Chinese economy and also on the US companies forced to leave China. After all, if you need to go and have to sell your business quickly, you will only get fire-sale prices. Meanwhile, even if China is urging calm, Beijing is letting the yuan slip. The currency is close to 7.15 versus the US dollar.

The cornerstone for the US economy remains the consumer. This week’s Conference Board data, highlighting how the consumer is feeling, will thus be crucial. You don’t want to hit consumer confidence. Most broker research reports also make it quite clear that this is vital for them not to reduce their US growth outlook. Also of interest, share-buy-back activity, last year’s major support for Wall Street, is also at risk. Not that the sums being thrown at the US stock market have fallen to zero. But over the weekend, the FT reported that during the second quarter the amounts spent on buying back shares fell compared to the first. The drop was about 19% quarter-on-quarter and about 12% year-on-year. Hence the question is how this will evolve. The money isn’t going into additional capex or R&D. Corporate America might simply become more cautious, especially in the light of current tensions.

It seems pretty obvious that corporate Germany is becoming more cautious. But whether caution is turning into outright pessimism will very much depend how this week’s Ifo figures turn out. If really poor, more and more economists will see a recession on the horizon for the third quarter. A bad figure will only increase the talk about stimulus.