BMA Market Insights: Global Protectionism Impeding Global Growth


U.S. markets waking up to a RISK-OFF sentiment after reports that China will narrow its range of topics they’re willing to negotiate when high-level talks resume on Thursday. China’s Vice Premier, Liu He, told visiting dignitaries he would present an offer to the U.S. though it will not include commitments on industrial policy or government subsidies – both core U.S. demands. In pre-market trading, equity futures drop 0.50% on the news and USD rates are trading 0.011% lower on average. The inversion of the yield curve deepens as we see two-year swaps 0.011% lower while four-year swaps are 0.016% lower.

After trade talks broke down over the Summer, the U.S. administration scrambled to restart negotiations and avoid further escalation of tariffs.  The U.S. viewed the solution as a three-phase approach: 

  1. Large scale purchases of U.S. agricultural and energy exports.
  2. Implementation of intellectual property rights.
  3. Partial rollback of U.S. tariffs.

Investors are right to be concerned as President Trump has repeatedly stated that he would only entertain an all-encompassing deal with China, an objective that is looking less likely to be accomplished.

While it’s clear both the U.S. and China want to be seen on the world stage as making progress on trade and policy, the ongoing impeachment discussions in the U.S. is likely being viewed by China as a weakening of Trump’s position. While an all-encompassing trade deal is unlikely to happen this week, a mutually beneficial mini trade deal involving the purchase of U.S. pork products by China and a delay on tariffs by the U.S. could occur.

Over the weekend in Stockholm, North Korea, and the U.S. concluded nuclear discussions – the first in eight months. North Korea’s nuclear envoy Kim Myong Gil said the U.S. arrived “empty-handed” and threatened to take the nuclear stalemate on a “new path” if the U.S. doesn’t ease up on economic sanctions by the end of 2019.

Adding fuel to the global RISK-OFF sentiment, the latest saga in Brexit discussions, U.K. Prime Minister Boris Johnson, was defiant on Sunday saying that the U.K. will leave the European Union (EU) on October 31 regardless of whether the EU accepts his latest offer. The original date for the formal divorce was March 29, 2019, decided after the 2016 Brexit referendum, and official notice was given in 2017.

Up ahead this week, Fed Chair Jerome Powell speaks on Tuesday with the September FOMC minutes release on Wednesday. On Thursday, we will see inflation (CPI) data released, followed by an updated gauge on consumer sentiment on Friday.