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May 7, 2019

Analysis | The Finance 202: Wall Street isn't panicking about U.S.-China trade tensions

By Tory Newmyer


Traders work on the floor of the New York Stock Exchange on Monday. (Photo by Spencer Platt/Getty Images)
Investors so far aren’t buying what Trump trade hawks are selling. 
But the administration is challenging the Wall Street consensus that a major trade deal with China is still close at hand. After a turbulent day in the market that ended with stocks paring early losses, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin stoked new fears that negotiations could unravel by accusing the Chinese of backing away from earlier commitments to economic changes.
The market is already on edge. A pair of Sunday tweets from President Trump threatening to ramp up tariffs on Chinese imports sparked the Monday morning sell-off, with the Dow Jones industrial average tumbling 471 points. Stocks recovered most of those losses — the Dow closed down 66 points — when news broke that a Chinese delegation still planned to travel to Washington this week in hopes of finalizing a deal.
Market watchers say investors are mostly concluding that the administration’s tough talk amounts to bluster aimed at securing the best possible terms. “The president’s tweets seemed to come out of nowhere. Nobody seemed to know what the president’s rationale was and what it meant for talks later this week,” said David Lafferty, senior vice president and chief market strategist at Natixis Investment Managers. “But the Chinese are still coming, and the market reflected that after a bad opening … Longer term, this is a good indication of what we’ve been saying: This is the new normal in U.S.-China trade relations.”
Research notes from big Wall Street firms reached similar conclusions. Goldman Sachs economists, for example, placed the odds of a tariff escalation at just 40 percent after Trump’s Sunday tweets. From my colleague Heather Long:
Dow is down 225 points. Why isn't it a worse as "Tariff Man" returns?
Answer: My inbox is FULL of Wall Street notes saying this is "just a negotiating tactic."
Goldman Sachs gives it only a 40% chance that tariffs on China will jump to 25% by Friday.
— Heather Long (@byHeatherLong) May 6, 2019
And Stephen Myrow, managing partner at policy research firm Beacon Policy Advisors, said Monday afternoon that investors he talked to mostly concluded the president dialed up his rhetoric as a negotiating tactic. “Right now, the base case is he was blowing off steam,” Myrow said. But, he added, there is a “legitimate risk” that Trump imposes the tariff increases, and a market that has priced in a done deal hasn’t appropriately accounted for the possibility. 
Mnuchin and Lighthizer on Monday “brushed aside worries over the impact on the economy or financial markets of a talks collapse,” my colleagues David Lynch and Bob Costa write. “Mnuchin said stock market concerns were playing no role in the administration’s strategy.”
We know, however, that Trump tracks the stock market impact of his ongoing faceoff with Beijing.
And at least one bank is warning investors that a market now flirting with all-time highs could prompt Trump to conclude he has more leash to drive a harder bargain with the Chinese, thereby menacing the market’s performance.
A BofA Merrill Lynch Global Research note on Monday called Trump’s threat to jack up duties on $200 billion worth of imports from 10 to 25 percent the “most significant escalation of the US-China trade war to date,” and argued the soaring market has given him license.
Markets, the bank said, “could be in for a bumpy ride before a trade deal is reached.”
LONG TIME, NO EMAIL: You’ve no doubt noticed this newsletter has been on an extended hiatus over the past few months, so I wanted to offer a word about where I’ve been.
For the last three and a half years, I’ve been battling bile duct cancer, a rare and nasty disease. With excellent medical care and good luck, I won the first round against it in 2016, but it returned last year. Once again, thanks to some brilliant medical care, we managed to keep the disease contained to my liver.
In January, I had a liver transplant, a procedure that offers a very good shot at a cure. The recovery was a little bumpier than expected, but I’m feeling much better — and eager and excited to get back to bringing you the best news and analysis on economic policymaking and market-moving developments from Washington.
I hope you’ll reincorporate the newsletter into your morning routine and be in touch with any feedback, criticism and tips. And I want to thank my Post family for their incredible support throughout this process. It’s great to be back.
We’ll be publishing three times a week — Tuesday, Wednesday, and Thursday — for the rest of this month and plan to return to five days a week in June.
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Mnuchin (L) and Lighthizer arrive for a group photo session after their meeting with Chinese Vice Premier Liu He in Beijing last week. (Andy Wong/ EPA-EFE)
Top Chinese negotiator still coming. "Despite the tough talk, [Lighthizer] and [Mnuchin] said the administration expects to host Chinese Vice Premier Liu He and a Chinese team for further talks in Washington on Thursday evening and Friday," my colleagues David and Bob write. "But with the officials publicly underscoring [Trump's] weekend anti-China broadside, prospects for a deal this week — as the administration had hoped for — appear to be fading."
Deal still possible this month? A plugged-in source emails with the view from China: "Full resolution of trade agreement may slow by a week or two but intentions not changed from Beijing side.”
(The popular view in China is decidedly darker. My colleague Anna Fifield reports from Beijing that on the Chinese Internet, Trump is "a Marvel supervillain who can wipe out half the universe with a snap of his fingers. But in Trump’s case, it’s the Chinese stock market he scorched with his threats to raise tariffs if Beijing doesn’t bend to his demands on trade.")
Trump's threats deepen GOP trade rift. The Post's Seung Min Kim and Erica Werner: "Trump’s threat to impose tariffs on $200 billion of Chinese goods has further inflamed the relationship between him and Senate Republicans over trade, as the GOP lawmakers fight an increasingly losing battle to push Trump away from his protectionist instincts... Senate Majority Whip John Thune (R-S.D.), who met with Trump last week on the issue, said Monday evening he was worried about the potential impact of Trump’s latest threat against China and that other Republicans were trying to make their case to the White House. 'I don’t think anybody is getting through on that issue at the moment,' said Thune, the No. 2 Senate Republican. 'We’re going to keep trying.'”
Bannon to Trump: Don't compromise. Stephen K. Bannon, Trump's former chief strategist, argues in a Post op-ed that it would be "futile" for the president to strike a deal with the Chinese: "The trade deal under negotiation this month is not a deal between two similar systems seeking closer ties, as its cheerleaders on Wall Street and in the media and academia argue. Rather, this is a fundamental clash between two radically different economic models... The president’s best political option is not to surrender, but rather to double down on the tariffs — they have been highly effective in pressuring the Chinese without harming the U.S. economy."
Pillsbury: Trump is right to drive a harder bargain. Michael Pillsbury, a Hudson Institute scholar who advises the White House on China, argues in a WSJ op-ed a big, long-term deal may not be possible: "It’s hardly surprising that the long-negotiated deal appears to be falling apart. China has been busy in these final three weeks trying to weaken the deal. That’s Beijing’s modus operandi: String the West along, then renegotiate and take back earlier concessions from the gullible 'barbarians.'"
— Mnuchin refuses to turn over Trump's taxes. Mnuchin formally said the administration would refuse to release Trump’s tax returns, which all but guarantees that House Democrats and the White House are headed to a court battle.
My colleagues Damian Paletta and Jeff Stein report: “Mnuchin, in a letter to House Ways and Means Committee Chairman Richard Neal (D-Mass.), said he had consulted with the Justice Department and that they had concluded that it would not be lawful for the Trump administration to turn over the tax returns because of potential violations of privacy.”
-- The administration’s fight with Congress centers on whether requesting six years’ worth of Trump personal and some of his business-related tax returns. Mnuchin told House Democrats that the Justice Department will back up his decision in a “published legal opinion as soon as practicable.”
-- But as Damian and Jeff report, “a number of legal experts have said it would be unprecedented for Mnuchin to refuse to turn over the tax returns, as the power for lawmakers to seek the returns is written explicitly in a 1924 law.”
-- Neal responds: “I will consult with counsel and determine the appropriate response.” Neal has been lambasted by some progressive groups for moving too slowly to jumpstart the process to obtain Trump’s returns. But the Massachusetts Democrat has said the reason he has been so methodical is to justify a possible court fight.

The Federal Reserve. (Chris Wattie/ Reuters)
Fed warns on corporate debt. WSJ's Andrew Ackerman: "The Federal Reserve identified rising sales of risky corporate debt as a top vulnerability facing the U.S. financial system, according to a report released Monday. Officials for the second time in six months cited potential risks tied to nonfinancial corporate borrowing, particularly leveraged loans—a $1.1 trillion market that the Fed said grew by 20% last year amid declining credit standards. They also flagged possible concerns in elevated asset prices and historically high debt owned by U.S. businesses...
"Monday’s report also identified potential economic shocks that could test the stability of the U.S. financial system, including trade tensions, potential spillover effects to the U.S. from a messy exit of Britain from the European Union and slowing economic growth globally."

In this Nov. 13, 2018 file photo, employees walk through a lobby at Amazon's headquarters in Seattle.  (Elaine Thompson/AP)
Anadarko moves to accept Occidental's offer, rejecting Chevron. WSJ's Andrew Ackerman: "Anadarko Petroleum Corp. said Monday that a $38 billion bid by Occidental Petroleum Corp. was superior to an offer it accepted from Chevron Corp., raising the stakes in the battle for the company. Anadarko said it had notified Chevron that it will terminate the $33 billion deal it struck with Chevron in favor of Occidental’s offer, a day after Occidental sweetened its bid by raising the cash portion. Chevron now has four business days to make another offer, Anadarko said, though that period could be extended. If Chevron doesn’t counter and the deal is terminated, Anadarko will owe it a $1 billion breakup fee."
— Amazon is the new mall... sort of: In a poetic twist, the same company that has been partially blamed for killing the American suburban mall is resurrecting some of the former malls around the country. Not so fast, however. This isn’t about being able to buy anything with Amazon prime benefits and get an Auntie Ann’s Pretzel at the same time. Rather this is about real estate, according to a Wall Street Journal video about the tech giant’s decision to scoop up some vacant malls in Ohio. (Note: Amazon CEO Jeff Bezos owns The Washington Post.)
According to the Journal, Amazon is using these former malls as fulfillment centers in its continuous quest to get you your deliveries faster. In that regard, the advantages that help spur suburban malls in the first place (proximity to large population centers, enormous square footage and access to major roadways) are just as beneficial to Amazon as they were to developers decades ago.
You can watch the full video here.

Two top Senate lawmakers on Monday expressed frustration with a federal probe into Facebook’s privacy practices, urging the government to move more swiftly and consider imposing tough punishments that target the company’s top executives.
Tony Romm
  • Lyft shares its Q1 earnings after the closing bell, just days before competitor Uber’s IPO goes public. Other notable companies reporting, per Kiplinger, include: Anheuser-Busch InBev, Electronic Arts, Energizer Holdings, DaVita, Ferrari, Papa John’s, Mylan, SeaWorld Entertainment and Western Union.
  • The Senate Judiciary Committee holds a hearing on intellectual property and the price of prescription drugs.
  • The Wilson Center holds an day-long event on U.S.-Japan Relations.
  • The American Enterprise Institute holds a discussion on Matt Fink’s new book “The Unlikely Reformer: Carter Glass and Financial Regulation.”
Coming Up
  • The House Transportation & Infrastructure Subcommittee on Aviation holds a hearing on the status of Boeing’s 737 Max on Wednesday.
  • The House Financial Services Subcommittee on Housing, Community Development and Insurance holds a hearing on the “state and barriers to minority homeownership” on Wednesday.
  • The Brookings Institution hosts an event to explore “how policy can help reduce housing stress on the middle class” on Wednesday.
  • The Center for Strategic and International Studies holds a discussion with Rep. Early Blumenauer (D-Ore.) on trade on Wednesday.
  • Ways & Means holds a hearing “Understanding the Tax Gap and Taxpayer Noncompliance” on Thursday.
  • The National Economists Club holds an event with former Federal Housing Finance Agency official Nayantara Hensel on Thursday.
From The Post's Tom Toles:

Our colleague Geoffrey A. Fowler skewers Amazon for storing data through Alexa:
How Britian's new royal baby is breaking ground:

Source: The Washington Post

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