PMC Weekly Review – February 25, 2019
A Macro View – Clock Ticking on March 1 US – China Trade Deadline
A US-China trade war continues to be at the forefront of global markets concerns. Though recent hopes of a breakthrough have made investors more positive, most still view the trade war as one of the major headwinds to global economic growth in 2019, as the ongoing trade tensions, which began seven months ago, have disrupted international trade and slowed the global economy. After a somewhat hairy 2018, a wind of change finally blew through in early December, as both countries agreed to a 90-day truce, which barred any new trade tariffs while negotiations are taking place. In early January 2019 in Beijing, the two countries held a fresh round of trade talks, lasting three days, and discussions appeared to have gone well. Though still unresolved, the countries seemed to be making some progress, with China pledging to purchase a substantial amount of US products amid rumors the US is considering lifting some tariffs in order to reach a deal.
As the March 1st deadline for a US-China trade deal fast approaches, optimism is rising that the world’s two largest economies can bring the issue to resolution. Talks continued in Washington this past week, following Treasury Secretary Steven Mnuchin’s and US trade officials’ trip to Beijing last week. Lower-level officials held a round of talks on Tuesday and Wednesday in Washington, with President Trump commenting on Tuesday that talks were going well, indicating that he may be open to extending the March 1st deadline in order to complete negotiations. High-level talks continued in Washington on Thursday and Friday. Most recently, news has circulated that negotiators are drawing up six memorandums of understanding on structural issues: forced technology transfer and cyber theft; intellectual property rights; services; currency; agriculture; and nontariff barriers to trade. Also, these memorandums are said to include a proposal for China to purchase an additional $30 billion a year of US agricultural products, a move that would help to improve significantly the trade imbalance between the two countries.
These memorandums mark the most noteworthy progress seen yet towards ending the trade war (now going on seven months). However, intellectual property theft, Chinese subsidization of state-owned enterprises, and forced technology transfer continue to pose a serious road block to reaching a trade agreement, unless President Trump chooses to make the trade deficit a priority. As comforting as it is that the two nations have begun to outline commitments regarding these structural issues, some of these changes (for example, the Chinese subsidization of state-owned enterprises), will not only take time to work out, but may not be made overnight. Enforceability is also an issue for many of the items, and it probably will need to be addressed. Though it remains to be seen, the United States also has not offered any real concessions thus far in return for the structural changes, other than removing the tariff barriers. However, given that 2018 marked its slowest growth in nearly 30 years, China may be slightly more motivated to come to an agreement.
The recent progress has been the most consequential we have seen between the two sides since tensions began, so the March 1st deadline presumably will be extended. It behooves the US and China to come to an agreement, as both countries’ economies have been hurt by the ongoing trade tensions. We are more likely near the beginning of actual legitimate negotiations not seen in previous months between the two nations, rather than close to an immediate resolution. If, however, the two countries fail to reach an agreement before the March 1st deadline, US tariffs are set to rise from 10% to 25% on $200 billion worth of Chinese imports.
purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2019 Envestnet. All rights reserved.