Submitted by Michael Every of Rabobank
It’s Valentine’s Day this week – and is love in the air? US President Trump has flagged a remarkable vision for North Korea, a country so poor and so mismanaged it is known for both nuclear weapons and cannibalism. A meeting 27-28 in Hanoi between Trump and Kim is now on and Trump tweeted “I look forward to seeing Chairman Kim & advancing the cause of peace!”, then: “North Korea, under the leadership of Kim Jong-un, will become a great Economic Powerhouse. He may surprise some but he won’t surprise me, because I have gotten to know him & fully understand how capable he is. North Korea will become a different kind of Rocket – an Economic one!” Talk about raising the bar – and dangling the keys of swinging-grooviness to Kim.
But could this be a tactical display of affection as US Trade Representative Lighthizer and Treasury Secretary Mnu-China arrive in Beijing to continue preparations for the next round of US-China trade talks. And on that front, optimists should read a Global Times editorial, “Smooth trade talks serve common interests of China and US”. That seems to be telling the story of an impending deal – but the gulf between the two rears its head. “To date, the US has openly talked about China needing “structural reforms,” especially in the hope that China will give up on its strategic plan “Made in China 2025.”….However, China will uphold the basic economic system and its right to develop high-tech manufacturing industries. The US government should have no more fantasies about China giving up its legitimate rights. After a few rounds of trade talks, it is reasonable to assume that the US is aware of where China’s bottom line lies.” As a backdrop to that, consider this story of a Chinese national walking away with a USD1bn stolen technology in his pocket; and the US Department of Energy closing its doors to foreign-talent recruitment
But then we see where self-image gap really lies: “…China has never been regarded by the international community as a country that breaks its promises…In terms of compliance with international treaties, it is no exaggeration to say that China’s credibility is much higher than that of the US.” Mmm, what about the South China Sea and breaches of both international law and promises to the US there? What about the UK-China agreement over Hong Kong, which China itself called meaningless?
Then the editorial makes clear the negotiations are basically over at this week’s level and it is all up to Trump and Xi, who aren’t going to meet before the deadline: “The 90-day negotiation between China and the US is to implement the consensus reached by the leaders of the two countries. The result shall be approved by the two leaders. It is not a trade consultation in the general sense.“ So nothing more than has already been offered will be on the table this week. And then the threats start. “The US government also needs to make rational judgements. If the negotiations fail, the US does not have more endurance than China. Both sides have no reason to turn a win-win situation into a total lose-lose outcome. In this case, no one shall stick to the idea of a unilateral victory. Mutual respect for the trade agreement must be the basic premise of a win-win situation.” I repeat, WHAT AGREEMENT? Surely not the soy and gas and paper-shuffling over “market access” for US financial firms? Yes, it appears so.
In short, markets risk getting pummelled by fast-moving political and geo-political developments, and this week offers no respite – and no love, believe me.
Consider that Turkey has finally spoken out about China’s alleged concentration camps in Xinjiang following the death of star Uhigur musician Abdurehim Heyit, whose family allege he was tortured to death in a “re-education centre”. Turkey now calls China’s actions “a great embarrassment for humanity”. That’s the first Muslim country to voice these concerns, and a great deal louder than anything we have heard from the usual stalwart defenders of global human rights. What does that imply for Turkey-China relations? Or Turkey-US? And hence for the battered Turkish currency?
Back in said defenders of global human rights, Germany has not closed its doors to China’s Huawei building its 5G network after Angela Merkel may have accepted Beijing’s promise that it won’t spy on it, honest. (As we see claims Brussels is riddled with hundreds of spies, including Chinese.) Strengthening a point I made last week, Germany fears Russia – and won’t stop buying Russian gas despite US pressure; it is one of the EU countries pushing to circumvent US sanctions on Iran, which is busy developing longer-range missiles; and it is winking at Huawei even as US Secretary of State Pompeo tries to rally US allies to shut it out. It also won’t pay 2% of GDP for NATO despite running budget surpluses; is not going to buy US F-35 fighter jets either, meaning no US nuclear umbrella; and over the weekend we saw calls in Germany for France to extend its nuclear umbrella for the whole EU, which other members will pay it for. So France would be the EU’s new nuclear shield. No more need for Uncle Sam. And hence Paris would be volunteering itself to be nuked to protect Latvia, for example – or Germany….Can I just say I am as sceptical about that as I am on the US-China trade deal? And can I also add the above also smells like a brewing US-German trade storm that markets are not pricing for?
And in the US, we have had news that talks (and many tweets) over the US border issue, suggesting that either a National Emergency or another government shut-down looms at the end of the week.
Something else for our currently lovey-dovey-(Feddy) markets to consider.