Morning Commentary: The Clock Goes TikTok

Foreign Exchange - Morning Commentary
The Clock Goes TikTok
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
While this weekend did not bring any fresh Sino-US conflicts, tensions around the US-China relationship remain high.  So where exactly are we on the major points of contention?

COVID-19: The Trump administration continues to put blame on China’s initial response to the COVID-19 pandemic.  As part of its response, the US cited concerns over how China influenced the organization’s decision making.  Despite all the rhetoric, the US has yet to take any economically significant action against China related to COVID-19.  Notably imports of medical supplies from China have spiked to all-time highs with May and June imports ~50% higher than pre-pandemic levels. 

Trade:  The US and China agreed to delay a review of the Phase 1 trade deal that was scheduled for August 15.  It is unclear exactly what is going on but an argument could be made that this is actually a step towards trade war de-escalation given how far China is from meeting its purchase target.  The overall US trade deficit with China has also risen. 

In normal times, the Trump administration might have responded to such undershoots in US imports with another round of tariffs; however, with the economy just emerging from its deepest recession in a century and the election less than three months away, these are not normal times.  There is a strong incentive to avoid economically painful actions making it politically expedient to delay the review than address the shortfall. 

Tech: Another possible reason for the delay in the Phase 1 review was China’s desire to discuss US policy on Chinese tech.  China wants to address tech and trade together while the US wants to separate them. 

Over the past couple months, the tech war has escalated significantly.  Of note are the US’s recent actions against Huawei.  Blocking Huawei’s foreign sales slows its growth, but the company can still sell in China and countries not part of the boycott.  But the US’s latest move cuts off key inputs that could put Huawei out of business.  Huawei currently has plenty of inventory and there is the possibility of a leadership change in the US so China can afford to wait before responding.  But if things start to get tight, it would be surprising if China didn’t retaliate in a material way against US food exports. 

As we get closer to the election, the picture gets even more complicated.  “Tough on China” remains a politically beneficial strategy, but China also gains leverage as it could cut US imports and hurt Trump’s voter base.  This complication contrasts to the clarity after the election where escalation appears inevitable regardless of who wins.  US-China decoupling likely happens quicker under Trump.  As for Biden, he likely seeks to rebuild relations with allies that comprise China’s other major export markets and take a multilateral approach.  So while the election could bring a détente, the post-election period could be especially turbulent.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • House Democrats passed a bill that would provide $25 billion for the Postal Service.  The vote was 257-150 with only 26 Republicans voting for it.  This implies that the bill’s odds of passing the Senate are limited.  Regarding the broader stimulus bill, both sides remain entrenched it their respective positions.
  • Tropical storms Marco and Laura have shut down 58% of oil and 45% of gas production in the Gulf of Mexico.  Marco is set to make landfall today and Laura, which is expected to be upgraded to a hurricane, is expected to hit Texas.  The threat from these two storms have pushed crude prices higher, but these gains have been limited by concerns around a resurgence in COVID case in parts of Asia and Europe.
  • On the virus front, New Zealand PM Ardern announced that Auckland will stay in lockdown 4 days longer than planned.  Bali has also announced it will be closed to foreign visitors for the rest of the year.  In the US, infection number have eased but still remain high with the resurgence of cases in some parts of Europe continuing. 
  • TikTok could file a lawsuit against the Trump administration as early as today.  Tencent stock jumped the most in a month as White House officials reportedly told American businessmen that a ban on WeChat won’t be as broad as feared.  President Trump is expected to make “tough on China” a theme of his speeches at the Republican National Convention.
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