January 15, 2020
With stocks sitting on record highs, we had the official signing of the Phase 1 U.S./China trade deal today.
Let’s revisit the important week of October that got us to this point.
It started on October 9th, when Trump, in anticipation of meetings with China in D.C. over the following two days, blacklisted eight Chinese tech firms and restricted the visas on some Chinese officials, all of which they associated with human rights abuses on Muslim minorities in China.
Why do this, just as they were heading into trade negotiations again?
Leverage. Trump has always had leverage over the Chinese on these negotiations, and had been in complete control (able to make concessions and pull the trigger on a deal at any time). But that leverage had eroded in recent months. And China had been signaling that perhaps they would hold out in hopes of seeing a new President in a year’s time.
But Trump found an angle to dissuade the Chinese from turning their backs on a deal. By taking aim at the human rights abuses of the CCP, he telegraphed how the specter of the fight might change.
Two days later, they were standing in the Oval Office shaking hands on a cut-down trade deal.
This is what the chart of stocks looks like since that October 11th handshake …
As I’ve said, with a fundamentally strong economy, Trump has been in the driver’s seat to force structural reform. And he’s getting it. Don’t underestimate the importance of dealing with the global imbalance issue that ultimately led to the global credit bubble and burst. And stopping the currency manipulation (and the related trade advantage) is at the core of it.
As part of the agreement, China has vowed to “achieve and maintain a market-determined exchange rate regime.” A floating exchange rate in China is very unlikely, but stronger yuan (to pacify the U.S.) is more likely. That curtails the trade advantage.
As you can see in the chart below, the Chinese have been moving the yuan in that direction (the decline the chart below represents a weaker U.S. dollar/ stronger Chinese yuan) since the handshake agreement in early October in the Oval Office. And there is likely a lot more to come.