We are past President Trump's front-end loading of Trade War talks going well, and they have come to a bit of a stale mate as the two parties do not see eye-to-eye on the structural Intellectual Property (IP) and technology transfer (aka "theft") issues, much to China's detriment. Despite Trump's insistent tweets on talks going "very very well," which gave just a bit of a teaser to get traders to rush in and cover their shorts, the talks have made "little progress" -- as quoted by U.S. Trade Representative Lighthizer.
To put it simply, the IP issue is make-or-break for any resolution to come. The three-day talks did nothing but air grievances from both sides. The next round of talks is going to be held on January 30-31, when President Xi Jinping's top economic advisor, Liu He, will visit Washington. Given how fickle investors have been these past few months, two weeks is equivalent to a year's worth of asset allocation shifts!
Chinese officials have apparently tried to make some form of concessions to the U.S. -- including a promise to eliminate the entire trade surplus with the U.S. by 2024. According to some reports, that figure amounts to around $600 billion of annual imports from the U.S. by then. This is just clever manoeuvring by China to appease Trump, as it will most likely just alter its imports from other nations to make up for the increase in U.S. imports. China imports about $20 billion in agricultural products from the U.S. It could buy less from France, Australia and Peru and direct it to the U.S.
To make the numbers work, China would need to increase imports of automobiles, machinery on top of food and oil. This will require a significant change in strategy, whether it can actually be implemented is another matter.
For now, the U.S. stands pat on the issue and is disregarding these concessions. Whether anything fruitful will come out of the talks at end January is anyone's guess. Both Trump and Xi Jinping know how much this feud is hurting global economic momentum and their local markets -- China more so, given its fragile, highly debt-levered system, hence the injection of 1.1 trillion yuan worth of liquidity last week, alone. This liquidity surge should not be mistaken for an open all-out stimulus policy, as investors had been accustomed to in the past.
We are in the heart of Q4 2018 earnings season. As companies are about to report, they enter a blackout period about 30 days prior to their earnings release. This means that they are unable to buy back their own stock over this time period -- one of the most supporting factors for markets in 2018, estimated to be around $646 billion by October 2018. Around February 5 2019, about 75% of U.S. companies in the S&P 500 will have reported their earnings, allowing these companies to resume buying back their stock. Until then, we are in a news vacuum -- which could cause the market to stagnate and drift lower.
The fundamental macro backdrop refuses to improve. South Korea released its Q4 2018 GDP figures, which showed exports slowing in the quarter by 2.2%, suggesting weakness in China, its largest export market. Taiwan, another key global port for trade, reported its export orders falling the most in two years on the back of slow Chinese demand -- bearing negative implications for global earnings growth rates for equities.
It is astonishing to see the market rally 15% from the lows based on the economic data that is being reported. The power of liquidity injections and unwind of consensual short positions can be a powerful tool to mask an underlying gloomy picture.
Investors would be wiser to focus on their fundamental models than trade headlines, as the devil will be in the detail of any agreement. It all depends how badly Trump needs a win going into his presidential campaign for 2020. If a deal is announced, even if there is no real resolution, the market will rally. The theatrics around political campaigning is mind boggling, especially at the expense of financial markets.