US-China trade deal may be a sell trigger

  • Business
  • Monday, 11 Feb 2019

U.S. Trade Representative Robert Lighthizer (2ndR) sitss across from China's Vice Premier Lie He (L) during the opening of US-China Trade Talks in the Eisenhower Executive Office Building at the White House in Washington, U.S., January 30. - Reuters

GETTING a trade deal done between two superpowers, the United States and China, is tough enough but there is already a call to sell upon any accord being struck.

One would view this to be positive for stocks but “buy on rumour, sell on fact” is the thinking behind this sell call. Growing speculation that it could be some “watered down” or “cosmetic” deal (although President Donald Trump, in his State of Union address, had called for real, structural change to end unfair trade practices) further spurred this negative, sell sentiment.

Recent rallies had been partly driven by some optimism for a deal which was quickly quashed by Trump saying, contrary to earlier reports, that he is not meeting President Xi JinPing before the March 1 deadline.

With a surge of 13% since Christmas, global stocks are poised for some correction even as the US economy is said to be still strong, while Chinese and European growth falter.

Already, some selling had started with the S&P 500 recording its biggest drop in two weeks, on pessimism that a deal may not be done by March 1, when US tariffs will be increased from 10% to 25% on US$200bil worth of Chinese imports.

Yet buoying hopes for some progress in the talks is the crucial visit to Beijing this week by US trade representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin.

While not too happy with China’s resumption of the purchase of agricultural products, Lighthizer was said to be optimistic of the upcoming meetings.

Mnuchin aims to hit the deadline so as that a hike in US tariffs can be averted on March 2; if there is any significant progress in the talks, the deadline may be extended. Could there be a chance that Trump and Xi would meet if this Beijing meeting goes well Markets are awaiting any statement indicating a narrowing of differences, to a sufficient degree that would warrant confidence.

The US side is still complaining of theft of intellectual property, forced technology transfer, Chinese government subsidies for stateowned enterprises and the lack of a monitoring system. There are compelling factors for a trade deal soon.

China’s purchasing managers’ index (PMI), that indicates the health of the manufacturing sector, is at almost an eight-year low, at 49.5; its service sector PMI, although still over 50, is declining. Soaring US farmbelt bankruptcies, on falling prices, rising interest rates as well as competition from Russia and Brazil, should spur US negotiators to find a speedy resolution.

Farmer bankruptcies in Arkansas, Iowa, Minnesota, Nebraska, North and South Dakota, surged by 96% last year, and 59% in Kansas, Colorado and Oklahoma, said Sputnik News, quoting data from the 8th Circuit Court of Appeals.

China had previously bought 30 million tonnes of US soybeans; in 2017, it bought about 60% of the US soybean crop. China has recently purchased 2.6 million tonnes, with a promise to buy another 5.0 million tonnes.

Besides lagging from previous amounts purchased, prices are still much lower than the US$10.50 per bushel last April when China launched retaliatory tariffs on US imports including soybeans.

“While a trade deal helps to remove uncertainty, it may trigger a ‘sell on fact’ as markets had somewhat factored in that some sort of deal will be reached,’’ said Lee Heng Guie, executive director, Socio Economic Research Center.

Still, there are optimists who think that a trade deal, which leads to the lifting of tariffs, would improve earnings and in some way, help revive some broken supply chains.

“It will be seized as a reason to keep buying, and for a new high in US markets, as a compliant Federal Reserve (that has indicated a pause in rate hikes) appears unwilling to cause a market downturn,’’ said Pong Teng Siew, head of research, InterPacific Securities.

Any resolution will help boost global growth which had been affected by, among other things, tariffs, supply chain disruptions and a dent in confidence. Besides deleveraging, Chinese growth had been impacted by Trump’s tariffs, which in turn, affected China’s major trading partners.

“I will collect cheap stocks in Malaysia ,’’ said Danny Wong, CEO, Areca Capital. “It will be stockpicking for the medium term, where the reformed economy is also expected to boost earnings and foreign inflows.’’

Trade tensions will weigh on the gross domestic product (GDP) of Malaysia, where total trade amounts to 111% of GDP, with China, the US and the European Union accounting for 38.4% of its exports.

Looking attractive on Bursa Malaysia are bluechips, especially dividend stocks, which have been at recent lows, and bashed down small caps with strong fundamentals.

Columnist Yap Leng Kuen views the benefits of a sustained trade deal.

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