Blotter: There is no such thing as a quick fix
It never ceases to amaze me how ignorant many investors and pundits are about how things actually work. The processes, legalities, and practicalities of trade deals are still actively debated when they should be known. This is probably why the handful of true global trade experts are running from meeting to meeting trying to clear the air. I am not one of those folks, but having spoken to many of them, I do know the following: You don’t fix a trade dispute with two formal meetings and expectations in the media that a resolution is coming to settle differences between the US and China are laughable. Negotiations of this sort take years to fix specific issues and if the Trump administration accepts the notion of the Chinese buying “more US goods” as a sign of victory, they do not know the Chinese and are setting themselves up to fail.
The Chinese have a habit of making grand announcements on policy without following through. The “hundreds of billions of dollars” in Belt and Road investments is actually only about $20 -$25 billion a year. Remember the Shanghai Free Trade Zone? Doesn’t exist anymore. The opening up of the Chinese capital account after entry into the IMF’s Special Drawing Rights basket in 2015? It is harder to move money in and out of the economy now than it has been in a decade. The speeches in Davos about free trade are nothing more than lip service to a global economy that is determined to find an alternative to the US order because of the anti-globalist policies of Donald Trump. I am no fan of the US president, but a world that is looking to China to lead the way as the US looks inward is a world that will be bitterly disappointed.
So Chinese promises to “Buy American” are hollow, and while they may lead to constructive commentary, nothing will change outside of taking trade off the front pages. For markets, that might actually be the point. In what will be a quiet week, headlines of a smiling Steven Mnuchin and Donald Trump claiming victory could be enough to give stocks a bid and put a floor in yields that look a tad toppy in the short term. US / China trade will cease to be a market moving headline once the Chinese delegation leaves Washington, which implies that hedges will be unwound. The thematic model portfolio will cover its Boeing short for a small loss.
Yet again, the focus this week will be on inflation. The Fed and ECB release minutes, which will be dissected for signs of changes in stance towards the prevailing inflation outlook. Is the Fed prepared to let the US economy run hot for a while should inflation move sustainably through the 2% band? Do we get signs, despite the current soft patch, that Mario Draghi is still planning to move forward with ending QE? The UK releases inflation data which should again be tepid, primarily due to continued pound strength on a year on year basis.
As for emerging markets, I have spoken for weeks now about the extraordinary buying opportunity that exists in EM assets on a two -to three-year view. The model portfolio is going to add a new 20% position to our EM currency exposure, this time funding against the USD by owning a basket of India, Indonesia, Brazil, Mexico, Russia and South Africa, 12 months forward. I am well aware of the idiosyncratic risks in many parts of EM, especially factors such as elections in Mexico and Turkey’s woes, but the asset class is just becoming too darn cheap not to embrace further. Brazilian equities are now on our radar screen after aggressive selling last week.
A quiet week on the data front: On Wednesday, Japan, Germany, the EU, and the US print Manufacturing PMI, and the UK prints CPI. On Thursday the Bank of Korea meets, and the US reports on Home Sales. On Friday, Japan prints CPI, and the US reports on Durable Goods Orders and Sentiment, courtesy of the University of Michigan.