Temporary or durable appeasement ?

Date: 28 January, 2019 - Blog

“Rumors of a G20 tacit pact multiply”

A commercial truce has been going on for a few weeks. So far, both Presidents have done their best to maintain a favorable / friendly discussion climate. Even controversial points of discord – such as the imprisonment of a senior Huawei leader – have been played down and handled through convenient scapegoats, such as Canada, for example … Beijing is at work, clearly. Kim’s four-day visit to Beijing recalls what happened a few quarters ago: prepare for the next Donald-Kim summit. The Chinese media flattered the young leader, pointing out his membership in the “millennial” club. In doing so, Beijing asserts a hierarchical – seniority – relationship with Xi. Beijing wants to provide funds and economic support to North Korea, provided it can “control” Pyongyang and avoid reunification of the two Koreas. Kim is both an important asset, but also a potential threat to China in its discussions with Washington. Kim is probably as unpredictable / unfair as Donald …

China has internationalized and “dedollarized” officially its currency in recent years. Therefore, it manages a basket of currencies to define the price of the Yuan, rather than a mere reference to the USD. Last week, the Chinese currency rose 1.3% against the US dollar, its biggest increase since 2005. This increase is most likely dictated by political considerations, because all the latest decisions of the PBoC (reduced requirements in terms of Chinese banks’ reserves) were not favorable to the yuan. MSCI will decide in the first quarter of 2019 whether Chinese equities qualify for a (substantially) higher weighting in its emerging indices. Good governance, reduced state intervention and the stabilization of the currency are important factors in this regard. A higher weighting of Chinese equities would inevitably lead to a virtuous inflow of foreign capital …

Trump trusteed the national political scene in 2018. This is no longer the case since the November elections. Democrats will be a permanent obstacle. Republican deputies are also cautious in the context of the 2020 elections. Prominent Republican deputies, like Mitt Romney, are developing fierce resistance within the party. The voters of the populist leader are beginning to be disillusioned. It is too early to know if they will move further towards the extreme right of the political landscape or rather support the liberal democratic trend again … The limits of Trump’s toxic formula have been reached. The erosion of trust, the optimization of discord and the constant evolution of its positions are short-term strategies. Effective exercise of power and lack of results prevent it from using the blame game. J. Powell’s violent attack, and thus the independence of the Fed, was probably the most salient symptom of this failure.

The MAGA mantra, “Make America Great Again”, loses its vigor and credibility. Trump is refocusing inward, out of obligation. Donald’s agenda on the home front is loaded and will remain so until the end of his term, which will encourage a shift in aggression. Given the recent downturn in the financial markets, there is a great political need to conclude an agreement. The Fed’s recent shift in rhetoric, the stabilization of crude and USD prices, and China’s political and economic initiatives are creating a framework for appeasement. This environment contrasts sharply with the sad last days of December 2018 … This is reminiscent of the G-20 Shanghai agreement in 2016, a prelude to global reflation. In conclusion, appeasement creates preconditions for the stabilization of markets. Xi and Trump have a common interest in extending it in the short term. However, it will not be enough, in itself, to promote a sustainable recovery of markets. A global trade agreement between the United States and China and the fall in Chinese key rates would generate a real “reflation trade” (see 2016). Emerging markets (particularly Asia), as well as commodities, would be the main beneficiaries.