The Morning Commentary: The Carrot or the Stick?

Foreign Exchange - Morning Commentary

The Carrot or the Stick?

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
The Trump administration has primarily used the stick against both allies and adversaries to obtain desired results regarding trade concessions to improve the massive U.S. trade deficit and level the playing field. While much of what the Trump administration is focusing on is to protect intellectual property rights and level the playing field regarding tariffs, in the background, the clock is running and time is getting shorter to achieve desired results.
The 2020 Presidential election will begin to get geared up on both political sides and the Trump administration wants a strong economy and a strong stock market heading into the campaign season. With the current government shutdown starting to bite into the economy and other signs of a slowing U.S. economy, the Trump administration needs to change the market dynamics, conclude a trade deal with China and the EZ, and get the U.S. and global economy back on track.
Late yesterday, the Wall Street Journal carried a story that Treasury Secretary Mnuchin was in favor of rolling back some of the sanctions against China to help current trade talks succeed. The Treasury department denied the story, but markets believe that this is just another piece of evidence pointing to a compromise. The hard-liners have been in charge regarding trade, but given the current political environment with Republicans and the Trump administration bearing more responsibility for the government shutdown, perhaps the carrot is winning out over the stick as a means to move the trade talks along.
Many market participants are skeptical of a shift in stance by the White House and expect that trade talks could get worse before they get better. There has been no sign that the hard-liners regarding trade are out of favor. In the short term, markets want to believe that the White House is looking to make a favorable trade deal; overnight, global equity markets responded positively to the headlines despite the denial and are a sea of green with China and German equity markets up nearly 2.00%. Time will tell as we are only a tweet away from confirming or denying a shift in tactics by the White House.
  • U.K. Retail Sales for December came in weaker than forecast at -0.9% but had little impact on the British pound (GBP). The GBP is consolidating its gains as short positions get covered on the near term optimism that a soft Brexit will finally be negotiated and there will not be a hard landing for the U.K. economy. The GBP is up nearly 2% in the past month.
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