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Trade Off

07 May 2019 by jbchevrel

On Monday, London was closed, but elsewhere CDS opened sharply wider on renewed trade concerns after President Trump tweeted on Sunday: “For 10 months, China has been paying Tariffs to the USA of 25% on $50B of High Tech, and 10% on $200B of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. $325B of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!”. Yesterday morning, President Trump added: “The US has been losing, for many years, $600B to $800B a year on Trade. With China we lose $500B. Sorry, we’re not going to be doing that anymore!”. The WSJ reported that “President’s warning to China takes Beijing by surprise” and “China Considers Pulling Out of Talks”. Following that, Chinese officials reportedly said that “China shouldn’t negotiate with a gun pointed to its head”. Chinese Vice PM Liu He had reportedly cancelled his trip to Washington DC this week following the tweet. But he will finally go on Thu/Fri. The latter came before iTraxx open and saw S&P futures regain 15 points, supporting the market in the first part of the session. President Xi had reportedly been encouraging the Chinese delegation to go. One can wonder what has changed on the US side of things, in terms of reaction function. Well interestingly, Axios cited a source familiar with the situation saying that Trump's view is that he is negotiating from a position of strength economically, especially after the latest strong labour report. Thus, as our CDS deltas are based on London closes, it is logical to see trade-related sector underperform vs Friday. Container companies like CMACG (+28) in Europe and KAWKIS (+10) in Japan lagged. Following base metals rout, miners are also underperforming, with European IG miners/base materials wider by ~10bp. AUCHAN was the worst performer in Main (+14), despite relatively solid retail sales as of March, in the Eurozone.