Phew, the G20 meeting finished without a glitch…
As you may already know, leaders from the Group of Twenty (G20) countries met up in Buenos Aires, Argentina, this past weekend to discuss trade. The G20 groups together countries from all over the world. Members make up 85% of the global economic output and 75% of all international trade.
That’s not to say there weren’t any awkward moments, like when US President Donald Trump left the stage too early, before they could take the traditional group photo…
But overall, the weekend was all smiles, photo ops and cooperation talk…
…even between the US and China.
As you probably already know, the two countries have been involved in a trade spat with both imposing tit for tat tariffs on each other.
Both leaders met on Saturday night for dinner. Investors were watching at the edge of their seats…anything could happen.
Yet things went off better than expected. US President Donald Trump and Chinese President Xi Jinping agreed to a 90-day truce as they resume negotiations.
As Bloomberg reported:
‘The White House called the meeting “highly successful,” saying the U.S. will leave existing tariffs on $200 billion of Chinese goods at 10 percent and refrain from raising that rate to 25 percent as planned on Jan. 1. In exchange, the U.S. wants an immediate start to talks on Trump’s biggest complaints about Chinese trade practices: intellectual property theft, non-tariff barriers and forced technology transfer.
‘After 90 days, if there’s no progress on structural reform, the U.S. will raise those tariffs to 25 percent, White House Press Secretary Sarah Huckabee Sanders said in a statement. China also agreed to boost its purchases of agricultural and industrial goods to reduce its trade imbalance with the U.S., she said.
‘“It’s an incredible deal. It goes down, certainly — if it happens, it goes down as one of the largest deals ever made,” Trump told reporters aboard Air Force One as he returned from Argentina. “China right now has major trade barriers — they’re major tariffs — and also major non-tariff barriers, which are brutal. China will be getting rid of many of them.”’
Global markets rallied yesterday after the news. An escalation of the US–China trade war was one of the big unknowns worrying markets.
The other factor is interest rate hikes
The US Fed has been raising interest rates and reducing their balance sheet all to prepare for the next recession, so they can cut them when the next recession hits.
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The Fed has raised interests three times this year, and is looking at another increase before the end of the year.
This big question haunting markets is how many times the Fed will raise rates in 2019.
Back in October, US Federal Reserve chairman Jerome Powell shook the markets by hinting that there were more rates coming.
As he said:
‘The really extremely accommodative low interest rates that we needed when the economy was quite weak, we don’t need those anymore. They’re not appropriate anymore.
‘Interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral. We may go past neutral, but we’re a long way from neutral at this point, probably.’
Yet in a speech last week, he hinted at a change.
As he said at The Economic Club of New York:
‘Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth.’
Notice the change from ‘long way from’ to ‘just below’ neutral. Markets have taken this change in rhetoric as a sign that the Fed may be pausing on their resolve.
These two bullish pieces of news could push the markets higher by the end of the year.
To be honest, we are doubtful the rally will last.
While there is a truce, the US and China are nowhere near seeing eye to eye on trade. And we expect tensions to continue in the next year.
In regards to interest rates, the fact is that no one knows how the future will play up…not even the Fed.
The US economy is booming. US unemployment rate is low and inflation could pick up at any time, which could mean that the Fed has to raise rates quicker than expected.
There is a lot of debt in all areas of the US economy— household, corporate and government — and at some point, all that debt will need to be repaid. Rising rates will make all that debt more expensive.
But for now, enjoy the Santa rally.
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Editor, Markets & Money