So, the trade war’s back on. The Vix volatility index spiked by 10% earlier this week, the Dow has fallen dramatically, and sentiment is once again edgy and uncertain.
Where do we go from here?
The straightforward proposition that both the Americans and the Chinese have plenty to gain from striking a deal and a lot to lose by not striking one remains as sound as ever. But it’s the terms that are the sticking point.
Earlier in the week, on Twitter, US President Trump tied apparent Chinese prevarication in the negotiations to the expectation that should a Democrat be elected in 2020, cutting a deal more favourable to China will be easier. This, though, was a statement really aimed at Mr Trump’s domestic audience, who are busy assessing the current crop of Democratic contenders and working out whether any of them really has a chance of beating him.
It’s not obvious that they do, given the strength of the US economy, and it’s not obvious either that any of the weaker candidates have much to parry Mr Trump’s jibes with, on China or anything else.
But internationally, the stakes couldn’t be higher. US control of the global economy remains intact for now, as its recent doubling down on sanctions against Iran makes clear. And China, in the end, will have to take some sort of a hit if it doesn’t bow down and sign some sort of a deal.
But some analysts have noted that after initial weakness on the latest tariff news markets in both Shanghai and Hong Kong recovered their poise. Quite why they haven’t tanked in the same way as US and European markets isn’t clear, but there’s some speculation that actually the fear of tariffs was weighing on sentiment and now that there here at least the uncertainty can be dispensed with.
Another theory has it that in the face of market weakness the Chinese government is able to call upon friendly buyers to generate a stabilising influence.
But it could also be that because Mr Trump is now beginning to play out his hand, investors now are looking towards the much longer term, and calculating just how much pressure from tariffs the Chinese economy really is able to absorb. It may be that it can absorb quite a lot, especially if the Chinse government’s stated goal of boosting domestic demand continues on successfully. And if it can, then reasons for fear and panic in the markets are much more limited.
Still, it’s also possible that even if investors are thinking this, they turn out to be wrong. At that point all bets will be off for the equity markets, and the global economy may be in for a period of serious structural readjustment.
But it’s not just the Chinese that have been able to salvage a few modicums of optimism amidst this latest escalation. The knock-on effects of the sanguinity of the Chinese can be seen in London, where the major minors all posted gains at the end of the week, on optimism that the Chinese economy won’t be derailed by this latest round of sanctions.
No doubt a few scraps of confidence remain too that a deal will still be signed at short notice, on talk of a “beautiful letter” that Mr Trump has received, and the ongoing visit of a high-level Chinese delegation to the US.
If it were signed the equity markets would get a sharp and sudden fillip, and Mr Trump would get a significant credibility boost. But even if a deal remains elusive, the market is beginning to adjust to the idea that the world’s two biggest economies, both of which remain in serious growth mode, might just be able to absorb the shock.
That’s an intriguing proposition, because it could mean the start of a new bi-lateral economic order, with certain parallels to the days in which the Soviet Union stood as an alternative to the West. This time round though, the US will be faced by what by all accounts is an extremely viable system. And the challenge will be that much more robust because of it.