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Global Economy Still Strong, But China Trade Is Troubling Global Economy Still Strong


Trade risk is real, but that is mostly going to be felt in China. For now, global growth trumps Trump’s trade war rhetoric, Barclays Capital believes. They are not alone. Most of Wall Street increasingly thinks this is a trade war the U.S. can win and is winning. At least in the near term.
It seems that even the mainstream financial press—long a proponent for tariff-free trade—has since discovered the distortions China brings to the market. China is known for questionable competition practices and subsidizing industries already grappling with oversupply issues, like steel and solar panels, to name a few.
China strategists are trying to convince Europe to side with them on a number of issues related to trade. In the best-case scenario, China ultimately relents andturns away from its decades-old mercantilism and opens its market more to competitors.
Despite the headlines of the first shots being fired in the China-U.S. Trade War, there is only one market taking this on the chin, and it isn’t the S&P 500.
Incoming data show a soaring U.S. economy, a healthy labor market with near full employment thanks to stricter border controls shrinking (illegal) lower skilled-labor pools, and some rebound in Europe and Japan. A full-blown trade war would bring stagflationary impulses globally, but for now overall fiscal and monetary policies, plus financial conditions led by regulatory rollback, support growth and investment.
Next week’s data out of Europe should confirm improving activity there as well.
For the U.S., June inflation numbers will be the market’s focus for the week while emerging-market fund managers will be waiting to see China data on new loans.
“In the near term, a sharper-than-expected China slowdown from a domestic credit crunch and external trade tensions could be the main risk to global growth,” says Christian Keller, head of economics research at Barclays Capital in London.
Last week, the U.S. slapped a 25% tariff on $34 billion worth of Chinese imports, effective immediately. China retaliated with the exact amount, hitting American agribusiness. Another $16 billion in Made in China tariffs will come online later this month. China will retaliate in kind, with energy and petrochemical products in the crosshairs. Sadly for China, this is like shooting itself in the foot as it already charges high tariffs on those items and needs soybeans, fuels and other chemicals. They will have to look for cheaper markets, if they can find them.
The biggest threat for U.S. companies in the different sectors being targeted is the loss of market share. This will take a good year to iron out. No one knows for sure which end is up, says Johan Gott, a principal with A.T. Kearney in Washington.
“Companies are in a holding pattern. No one knows how long these tariffs will last,” he says.
President Trump also pointed to possible plans for another $200 billion “in abeyance,” and he threatened to ultimately put tariffs on all Chinese imports. The next things to watch for will be who sides with China. If Europe sides with China, it could be harder for the U.S. to avoid a deeper riff with the Union over their own respective trade differences.
Then there is the North American Free Trade Agreement. The recent election of pragmatic, left-of-center leader Andrés Manuel López Obrador in Mexico signals that the U.S. and Mexico are now led by NAFTA skeptics. Obrador sent a fig leaf to Trump and invited him to his inauguration. If Obrador can help Trump on Trump’s pet-peeve, illegal immigration, both sides may come to a deal sooner than anyone imagined. Like Obrador, Trump would also like to see Mexicans making more money, making it harder for corporations to relocate based on labor rates. If Trump shuns Obrador, NAFTA will start looking weak again. Had Obrador given Trump the virtual finger, which some expected (and others hoped for), NAFTA would be in worse shape, as would the outlook for global trade.
Investors seem willing to bet that the near-term winner of the trade war is Trump. However, the detrimental effects of an escalating trade war are being considered by central bankers here and in Europe. The negative impact mainly comes from a worsening in business sentiment and corporate investment.
Fed members have said in reports that “plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy.”
Despite months of Trump tearing up trade orthodoxy, economic data remains strong here as well as in Germany, where after a batch of weak datapoints, factory orders and May industrial production numbers came in stronger than expected. Germany also faces Trump’s ire over trade.
Moreover, solid industrial production stats out of France and Italy, expected this week, could convince the market that the nationalist politics taking hold in Italy and Germany (France’s president Macron’s approval now worse than Trump’s) have not pulled the rug out from the economies. On the contrary. New leaders are less austere, more pro-growth. The nationalist push in Europe is largely a reaction to the EU’s unpopular migrant policy.
Similarly, Japan’s Tankan survey showed elevated business sentiment thanks to strong corporate earnings and better than expected capital expenditures.
In Brexit land, service and composite PMI posted a strong rebound in June, which could be further corroborated by next week’s new monthly GDP estimate.
China is the only one major economy that’s in somewhat of a pickle. The MSCI China is in bear territory, down over 20% from its high on January 26. Softer manufacturing PMI figures in China could offset a U.S.-driven global rebound.
“China’s economy now faces the parallel challenge of negative domestic credit … and uncertainties around trade,” says BarCap’s Keller. “Given China’s impact on the global economy, (this) could pose the main risk to the optimistic global growth outlook,” he says.


 Source: Forbes
culled:hellenicshippingnews