Little progress made in US-China trade negotiations

Summary:

• No breakthrough made during two-day trade talks between the US and China

• Chinese manufacturing PMI shrinks more than expected in January

• US and Asian stocks mixed, AUD under pressure

No breakthrough in sight

The two-day talks between the United States and China concluded on Thursday with both sides releasing fairly upbeat statements. In spite of the fact that we were offered many encouraging words, no breakthrough was made and nothing suggest it could happen any time soon. What could be interesting, both sides were talking about currencies and their impact on trade flows. Trump sticked to its view that the March 1 is a hard deadline and new tariffs on Chinese goods will increase unless a satisfactory outcome is reached by then. On the other hand, the US President promised to dispatch two of his top negotiators (Lighthizer and Mnuchin) to China following the meeting in Washington. They are expected to visit the Asian nation in mid-February in order to conduct the next round of talks. US Trade Representative Robert Lighthizer also stressed that Chinese commitments on trade needed to be specific and enforceable adding that no discuss on lifting tariffs during the meeting in the US capital took place. In turn, a China’s statement underlined that the world’s second largest economy agreed to increase imports of US agriculture, energy, industrial products and services. Both countries also agreed to strengthen cooperation on intellectual property rights and technology transfer, as China’s Xinhua agency reported. While some progress has been made, much work remains to be done, as the White House wrote in its statement. Finally Donald Trump expressed willingness to meet with Xi Jinping after receiving an invitation from the Chinese President. There are rumours that the meeting could take place in late February when Trump is scheduled to meet with North Korea’s Kim Jong Un. What have we learnt following the two-day talks? As we had assumed prior to the event, both countries expressed will to keep negotiating. However, no material progress has been made as of yet and with time elapsing markets could become more sceptical that any binding agreement is really achievable so as to avoid a further trade war escalation to the detriment of the global economy.

The Chinese Hang Seng (CHNComp) seems to be lacking bullish momentum. After making a 13% gain in January, there is a chance to see a pullback in the new month. This is especially true if trade negotiations fail to produce a desirable accord. In short, further upside is limited with decent space for falls. Source: xStation5

China’s PMI disappoints

The Caixin/Markit manufacturing PMI for January fell to 48.3 falling short of the median estimate of 49.6. It was a second straight decline and the index reached its worst result since February 2016. The details also sound alarm with new orders contracting for the second month in a row to 47.3, the lowest since September 2015. Factory output also fell, producing its first decline in 31 months, as stuttering demand keeps eating into production plans. How long this slowdown could last? Over the course of the recent months Beijing has undertaken some steps to handle this economic slowdown by implementing an array of measures. Nevertheless, some time is needed before the measures begin kicking in. Therefore, we expect that some green shots of recovery could arise during the second quarter. Either way, do not expect the China’s authorities will be able to rekindle growth so much, and at any cost, as they tended to do so in the past. The message from Beijing is clear, some steps will be taken to address the slowdown, but at the same time it will keep a close eye on debt. When China keeps its debt in check do not expect any spectacular outcomes from the measures being implemented of late. This is why we reckon that the China’s economy will continue slowing down even as the country could experience a better period in the meantime.

The Australian dollar is feeling the pain of the sluggish China’s manufacturing PMI. The pair broke below its short-term trend line and thereby one may expect the move to extent beyond 0.7235. Source: xStation5

In the other news:

• Japan’s jobless rate for December fell to 2.4% from 2.5%; the job-to-application ratio held at 1.63

• China’s holdings of US Treasuries fell in November to $1.12 trillion, the lowest level in a year and a half