CHINA-US TENSION, TAIWAN, US DOLLAR, S&P 500, FED INTEREST RATE HIKE – TALKING POINTS
- Xi-Biden summit probably solely to realize surface-level diplomatic breakthroughs
- Competing world and regional priorities might forestall significant cooperation
- S&P 500 in danger forward of precarious vacation season, geopolitical uncertainty
Regardless of surface-level makes an attempt at Sino-US diplomacy, the truth of a bolder and extra aggressive China will probably undermine future talks between Beijing and Washington. Whereas US President Biden spoke of “strategic competitors” with China, Xi Jinping’s actions – domestically and overseas – sign a departure from the place the US would really like relations to go.
What does competing international coverage imply for monetary markets?
No Extra a Hidden Dragon
As I wrote in my previous report, Xi Jinping has cultivated a powerful sense of Chinese language nationalism and used it as the muse for his bolder and more and more confrontational method to the US. Whereas Deng Xiaoping mentioned to “cover your power and bide your time”, the present Chinese language president has unleashed the dragon from the cave.
It’s due to this fact not completely by coincidence that China flew over 20 fighter jets and different warplanes close to Taiwan, particularly on China’s Nationwide Day. Finally, a report 56 bombers and different aircrafts flew close to the island. Following the demonstration, Xi Jinping referred to as for a “peaceable reunification” with Taiwan.
Such aggressive rhetoric and provocative actions from Beijing will not be misplaced on the West. Latest stories revealed that American troops have been secretly coaching army personnel in Taiwan as the specter of escalation grows. This comes a lot to the chagrin of Chinese language officers, who’ve repeatedly harassed that actions within the area don’t fall beneath the jurisdiction of the US.
Whereas each Xi and Biden have agreed to stick to the so-called Taiwan Settlement (in essence, non-interference by China and no official recognition of the island as a sovereign state), it’s unclear how Beijing will maintain up its finish. The Asian big’s pivot in direction of regional fortification and nationwide rejuvenation goes towards the established order. In some unspecified time in the future, one thing has to provide.
For monetary markets which can be already sweating the prospect of tapering Fed stimulus and subsequent rate of interest hikes, an uneven geopolitical shock might trigger equities to wobble. Whereas the baseline expectation is for US-China relations to stay considerably tense, the capital markets’ cussed bullish bias could also be setting them up for an sudden shock.
Shares may even see a pullback in direction of the tip of the 12 months on account of what Nobel prize-winning economist Robert Shiller calls a “constellation of narratives”. This contains shaky US-China relations, precarious retail gross sales forecasts forward of a vacation season throughout a worldwide provide chain hiccup, and concern a few hawkish Fed (if financial information helps officers’ outlook).
Concern concerning the latter – notably because it pertains to growing strain to hike charges and counter rising inflation – was amplified after a latest report by the IMF. The multinational lender of final resort mentioned in its bi-annual Global Financial Stability Report (GFSR) that central banks such because the Federal Reserve ought to be ready to must tighten credit score situations.
Taking away ultra-accommodative coverage assist from what at the moment are closely liquidity-addicted markets might put a premium on haven-linked property just like the US Dollar. Along with danger aversion, the Dollar might achieve a yield benefit relative to its friends, the place financial authorities could also be slower to boost charges relative to the Fed.
A Crouching Tiger? S&P 500 Chart Evaluation
For the reason that March 2020 backside, the S&P 500 has climbed alongside a gentle 18-month uptrend, clocking in a whopping 90 p.c rise. The benchmark index declined a bit over three p.c in latest weeks nevertheless, and in that course of invalided rising pattern assist. The implications of this breach for broader positioning will in all probability reveal themselves within the subsequent few weeks.
S&P 500 – Weekly Chart
Chart crated with TradingView
The decisive break from the uptrend means a type of “cooling off” interval might ensue on account of sellers exiting their positions and taking earnings at all-time highs. As traders recalibrate their positions, a short-term restoration might play out. The elemental dangers famous above might curb the S&P 500’s enthusiasm nevertheless, making a restoration harder and even perhaps setting the stage for a longer-lasting downshift.
US-China Outlook on Commerce: The Ghost of Tariffs Previous?
The USA Commerce Consultant (USTR) Katherine Tsai and the Biden administration as an entire just lately made it clear that they may maintain Beijing accountable for the commerce settlement struck with the previous Trump authorities. This additional reinforces the macro, geopolitical evaluation that US-China relations are more likely to be extra combative than cooperative for years to return.
China is about to fall in need of its 2021 agreements to buy a predetermined quantity of US items by roughly 30 p.c. Beijing is trying to barter the settlement since COVID-19 was an unprecedented circumstance that made fulfilling the unique obligation exponentially harder.
Washington made it clear that tariffs and different financial measures will not be off the desk if Sino-US talks don’t yield fruitful breakthroughs on the settlement. One of many carryover points from the Trump to the Biden administration is the underlying concern about China’s use of state backing to subsidize home companies and thereby tip the scales towards rivals overseas.
In essence, by year-end and early into 2022, markets could also be coping with what they skilled in 2019: commerce wars and rising rates of interest. Solely this time, there’s a significantly extra unstable macroeconomic and geopolitical backdrop. These gloomy presentiments might reinforce a bullish outlook for the US Greenback within the last breaths of 2021.
Marx as soon as wrote that “historical past repeats itself, first as tragedy, second as farce”. In a sadistically comical manner, he might have been proper. Due to this fact, merchants could also be extra prudent with their portfolio allocations as they put together for a season of peril and the following iteration of a historic farce.
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