Brief Macro: Amidst Sino-US Economic Uncertainty…US Ponders Plaza-Style Accord on Trade Dispute and more

In this briefing:

1. Amidst Sino-US Economic Uncertainty…US Ponders Plaza-Style Accord on Trade Dispute
2. UK Politics: Showdown Postponed Again
3. Flash During Trade Talks
4. China’s Coal Conundrum
5. Asia’s External Balances Signal Safety for Investors

1. Amidst Sino-US Economic Uncertainty…US Ponders Plaza-Style Accord on Trade Dispute

Successful resolution of geopolitical issues pertaining to China’s continued integration into the world economy remains crucial for global corporate profit expectations and risky assets.

Uncertainty about the US economic outlook has increased in recent weeks as testified by falling corporate profit growth expectations, while the recent government shutdown has delayed the release of crucial data required for monetary policy formulation.

China’s economy continues to decelerate, as testified by slowing big ticket activity, but record monthly credit growth in January indicates how the fallout from the US trade dispute has diverted attention away from lowering excessive leverage in the economy, as well as rising bond defaults. 

The US will insist that currency devaluation by China cannot be deployed under any Sino-US trade dispute resolution, but this will reduce China’s sovereignty over discretionary monetary policy conduct.

Meanwhile, rumours are circulating that the US wants to impose a Plaza Accord style memorandum for China to be committed to an orderly appreciation of the yuan as part of any trade dispute resolution, but China will be wary of the fate that befell Japan after 1985 following the Plaza agreement.

2. UK Politics: Showdown Postponed Again

• The 27 February sitting of UK political theatre now looks set to be a damp squib, with the main parliamentary clashes postponed to March.
• The “meaningful vote” on the government’s tweaked Brexit deal is scheduled for 12 March. If a proper state-dependent break clause is contained in a codicil, it may pass. Otherwise, an extension request is likely to be approved on 14 March.
• A short delay might become a long one and no Brexit. New government scheduling and Labour positioning slightly shift my probabilities of a deal, no deal, and no Brexit from 55:30:15 to 55:25:20. No deal remains the default even if delayed.

3. Flash During Trade Talks

So we hear that President Trump may be doing something in Vietnam prior to the March 1 trade deadline. Even though Trump tweeted the tariffs will not be implemented on March 1, you can be sure that negotiations are still going at full speed. However, in the shadow of trade talks we are looking at China’s Flash numbers as an indicator of economic health.

4. China’s Coal Conundrum

Last Friday China torpedoed Australia’s coal imports after announcing that the middle kingdom would no longer accept coal imports from Australia. This leads us to consider some of the energy issues related to China. We write often about coal and the importance it has on China’s energy consumption. 

5. Asia’s External Balances Signal Safety for Investors

Asian currencies are, in general, well supported by economic fundamentals in the form of external surpluses and interest rate differentials. Indeed, most Asian currencies display an appreciating bias, contrary to perceptions in 2018 when all of them lost ground to the US dollar. Over the last year the underlying external strength has been reflected in Asian currency appreciation against the US dollar.