巴黎银行-全球-宏观策略-贸易纠纷深度研究-20190514-23页.pdf

|DEEP DIVE 14/05/2019 1 DEEP DIVE|GLOBAL 14 May 2019 Trade trouble KEY MESSAGES The chances of an imminent USChina trade deal have reduced considerably,in our view.Our base case with a probability of 50%is now that talks will continue but that the current stand-off will persist until at least the end of this year.Higher tariffs and persistent uncertainty look set to take an additional toll on Chinas economy,push up US inflation and weigh on trade and manufacturing globally.Japan and the eurozone will be among the main losers,in our view,and Brazil a potential beneficiary of trade diversion,at least initially.We attribute a probability of 30%to a breakthrough,possibly in the summer.But even if there is a deal,we would not expect it to resolve more fundamental tensions between the US and China,leaving scope for persistent friction.In our view,there is a 20%probability of further escalation in USChina tensions.Please refer to important information and MAR disclosures at the end of this report MARKET ECONOMICS|COMMODITIES|G10FX|EQUITY&DERIVATIVES|G10 INTEREST RATES|EM STRATEGY|EM ECONOMICS|CREDIT MARKET VIEWS Our expectations on trade pose a risk to our long carry,short vol theme.Consider unwinding this position.Rates:In Europe we see room for a bull flattening if the ECB under-delivers on stimulus.In the US,an escalation of the trade dispute could raise rate cut expectations,while an improvement would likely lower the flight-to-quality premium.Credit*:An escalation of tensions could be very bearish,with underperformance particularly stark in Cyclicals,trade-sensitive issuers and European vs.US Credit.Equities:Consider taking risk off the table or at least hedging equity exposure.FX:Trade tensions not as bearish EURUSD as in 2018,consider short USDJPY.Asia FX is likely to depreciate,in our view,led by the renminbi.EM:If tensions increase we expect commodity-driven currencies to underperform.We like long CE3 currencies against the USD and short Asian currencies.We also favour receiving local currency rates in Brazil,China and Mexico.Contents No imminent breakthrough in sight.2 Scenario analysis.3 Economic implications for developed markets.4 Implications for emerging markets.6 Market implications.8 Market implications European and US rates.9 Market implications Credit and equity derivatives.10 Market implications FX.11 Oil unfazed so far by USChina trade tensions.12 Appendix:USEurope trade relationship13 Authors.15 Legal notice.16*This Credit section has been prepared by Viktor Hjort part of the Credit Trading Desk Analyst team,who work closely with the Sales and Trading function.This is not a research report and has not been prepared by the BNP Paribas Research department.Please see disclaimer.See contacts page for author details.14/05/2019 2 President Donald Trumps decision to ramp up tariffs on USD200bn worth of Chinese imports was reportedly in response to China backtracking on some agreed points of the deal under negotiation or at least pushing back more forcefully on some US demands.If so,Chinas attitude might have reflected some or all of the below:negotiating tactics aimed at gaining some last-minute concessions;a(misplaced)conviction the US president was particularly keen to close a deal ahead of his re-election campaign;a more relaxed attitude to the prospect of prolonged negotiation,thanks to the improvement in the Chinese economy in early 2019 and other developments,such the Belt and Road Initiative.Similarly,US negotiators might have overestimated the willingness of the Chinese authorities to strike a deal and underestimated the significant political resistance within China to a deal and the associated reforms.Key sticking points include the following.Existing tariffs:The US appears to be inclined to enforce Chinese commitments to the deal by retaining some or most of the tariffs already imposed.China requested their lifting as a precondition to a deal.Increased US imports:Although China agreed to raise its purchases of US natural gas,soybeans and other goods,it would not commit to aggressive targets not in line with natural Chinese demand.Enforcement/monitoring:Chinas authorities regard as a violation of its sovereignty US demands that the agreement be enshrined in Chinese law rather than administrative measures,and that monitoring groups release public reports on commitment.While a deal remains in both parties interest,in our view,the recent spat puts significant obstacles in the way of an imminent resolution.Overall,the impasse has probably bolstered hawkish arguments on both sides claiming a lack of good faith on the other side.On the US side,President Trumps incentives to push for an immediate deal may be coloured by his view that higher tariff revenue represents a win for the US anyway,and that he enjoys bipartisan support in his pushback against China.His proposal to provide fiscal aid to the farmers potentially hit by lower demand from China would further bolster his political base.Note here that the tough stance on China is one of the few issues where President Trump enjoys bipartisan support,limiting the likelihood that recent developments would backfire politically.Senior Democrats House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer have urged the president to remain firm.On the Chinese side,we would expect the leadership to be keen to show strength in response to Mr Trumps negotiating tactics.Vice-Premier Liu Hes recent comments that the text of the deal should be“balanced”to ensure the“dignity”of both nations encapsulate this point.This year marks the 100th anniversary of the Versailles Peace Conference,where former German colonial possessions in the Shandong Peninsula(notably,the port of Tsingtao)were handed over to Japan,having been promised to China when it joined the Allied side during the First World War.The subsequent May Fourth protests by Chinese students were a landmark event in the rise of the Communist movement in the country.Against this backdrop,it is difficult to foresee a turnaround in the talks any time soon and we believe the probability of an imminent deal has fallen considerably.Our base case is now that the impasse will last at least until the end of the year,with talks resuming later this year after a cooling-off period.Even more important,we would argue,is that the setback in the talks shows that trade is only one element of tensions that reflect deep differences in the two countries economic models,geopolitical rivalry and mutual distrust.Even if a trade deal is achieved,therefore,we would expect persistent friction over its implementation and enforcement.In our view,the markets underestimate the probability of more protracted instability in the USChina relationship.No imminent breakthrough in sight MARKET ECONOMICS Luigi Speranza,Chief Global Economist|BNP Paribas London Branch|XD Chen,Chief China Economist|BNP Paribas China Limited Beijing Branch|DEEP DIVE Fig.1:Global capex expectations(diffusion index,pp)Sources:IFO,Macrobond,BNP Paribas 14/05/2019 3 Scenario analysis MARKET ECONOMICS Sales We envisage three possible scenarios from now to the end of the year.Holding pattern:Our base case is that both the US and China will go ahead with announced policy actions but refrain from any further escalation.The US raised tariffs on USD200bn worth of Chinese imports from 10%to 25%.China responded by raising to 525%additional tariffs on USD60bn of US imports and delaying plans to relax restrictions and open up sectors of Chinas economy to US firms.Beyond this,the US and China would tacitly agree to continue talks after the summer after taking stock of the situation and studying the impacts on their own respective economies.However,we would not expect a deal before the end of the year.In that event,the chance of a deal thereafter would diminish further in the run-up to the US presidential election.This is in contrast with our previous base case of a deal during H1 2019.Breakthrough:President Trumps tweet about a“beautiful letter”from President Xi suggests that direct leader-to-leader conversations might still turn things around this year,possibly at the G20 meeting in late June.See the text box below for potential catalysts.But a breakthrough has only a one-in-three chance of success,in our view,as there still looks to be a significant gap between the two parties non-negotiable red lines despite recent Chinese reporting that there are only three major differences and not seven,as earlier US reporting suggested.We think both sides would be sensitive to potential domestic criticism if perceived as conceding or capitulating to the other.US Trade Representative Robert Lighthizer had earlier put progress towards an agreement at 90%,but we think this has been superseded by recent developments and note that even a 99%complete agreement might still fall through.Escalation:In this scenario,on top of the above measures,the US would proceed with more tariffs before the summer on an additional USD325bn of Chinese imports.This would take some time to implement,as the US Trade Representatives proposal would need another period of public comment and even lengthier review process to determine whether to exempt certain goods so as to minimise the disruption to American consumers.The Trump administration would also most likely use fiscal aid packages to shield the US agricultural sector.Nevertheless,the US announcement would most likely result in further retaliation from China and an accelerating downward spiral in relations,effectively precluding any agreement certainly for the rest of 2019 and probably beyond the US election in November 2020.What could change things?In our view,potential catalysts for a more conciliatory US stance might include a significant deterioration in the US economy and asset prices and a hit to US consumer spending power.So far,the markets have fallen by only about 5%,but a further significant fall in the S&P500 might have implications for Mr Trumps political calculus.A strong push-back from US corporates and/or other lobbies hit by the tariffs might also make a difference,as might a hit to US consumers purchasing power owing to a sizeable impact on prices of imported goods(see below).On the Chinese side,a significant deceleration of the economy might temper the governments stance.However,we believe the first response in both the US and China to any adverse economic or market shocks would more likely be fiscal and monetary stimulus rather than an early return to the negotiating table.Luigi Speranza,Chief Global Economist|BNP Paribas London Branch|XD Chen,Chief China Economist|BNP Paribas China Limited Beijing Branch|DEEP DIVE 14/05/2019 4 In the medium term,higher tariffs imply reduced competition,lower productivity and inefficient distribution of resources ie,a negative supply shock.In the short term,recent developments key impact is likely to come from a reduction in global trade and persistent uncertainty,deterring investment,encouraging precautionary savings and possibly affecting the markets through higher risk premia.We would expect to see the largest impact on countries with a high exposure to world trade and a large export sector relative to GDP:China,the eurozone,Japan and emerging markets in Asia and Central Europe.Brazil would be among potential winners,given scope for increased soybean exports to China.Short-term impact on US:We believe the impact should be minor and cushioned by fiscal and possibly even monetary support.The direct short-term impact on US output should be only 0.1%of GDP.But the central scenario of continued trade uncertainty exacerbates weak business investment,offsetting relatively strong private consumption and wage growth,supporting our view of a slowdown in H2.Meanwhile,the short-term impact on inflation should be an additional+0.10.2%annualized,first impacting PPI and the GDP deflator before passing through to CPI over two to four quarters.This reinforces our view that the Fed will remain on hold for the rest of the year(apart from minor adjustments to the IOER and other liquidity mechanisms),but with downside bias towards a rate cut.Short-term impact on China:We estimate the recently announced tariffs increases will exert an additional drag of about 0.2pp on growth this year.Part of the impact would be cushioned by policy stimulus.But given lags,we now forecast the economy to bottom out in Q3(rather than in Q2 previously),with an average growth rate of 6.2%this year(losing Q1s stronger-than-expected growth momentum).Short-term impact on eurozone:Its high exposure to global trade(and China in particular)means one of the losers from persistent trade tensions is likely to be the eurozone,and Germany and Italy in particular.Large-scale simulation models suggest that a 1pp decline in Chinese GDP growth would imply about a 0.1pp hit to eurozone GDP growth(see,for example,IMF,Deutsche Bundesbank,ECB and OECD).We think these estimates err on the side of caution.If we combine the direct trade effect with the uncertainty effect,recent developments effectively offset Q1s positive GDP surprise,in our view.The silver lining,we think,is that Mr Trump now looks more likely to postpone the decision on car tariffs(see Appendix).In the event that the US implements a 2025%tariff on imports of EU cars,the total impact would be to shave off an additional 0.10.25pp from eurozone GDP,we estimate(and even more in Germany).At this stage,however,we think the crucial factor is that the trade-related uncertainty weighing on the eurozones growth outlook is being exacerbated rather than resolved.Against this backdrop,the ECBs room for manoeuvre appears to be limited,not least because of the imminent change in its leadership.We expect the central bank to announce the TLTRO modalities at its June meeting and to keep the possibility of rate tiering alive.Conversely,the threshold for re-engaging in QE looks rather high and would,we think,require a fully-fledged recession.Economic implications for developed markets MARKET ECONOMICS Sources:IHS Markit,Macrobond,BNP Paribas Luigi Speranza,Chief Global Economist|BNP Paribas London Branch|XD Chen,Chief China Economist|BNP Paribas China Limited Beijing Branch|Spyros Andreopoulos,Senior European Economist|BNP Paribas SA Zweigniederlassung Frankfurt|Andrew Schneider,US Economist|BNP Paribas Securities Corp|DEEP DIVE Sources:US Census,BNP Paribas Fig.1:US imports from China(%y/y)Fig.2:PMI export orders(index)14/05/2019 5 Short-term impact on Japan:USChina trade tensions mainly affect Japan through global demand for its key exports,capital goods,which have been trending down since last autumn due to sharply lower Chinese demand.The global sentiment impact of heightened uncertainty suggests such weakness will persist into H2 2019 and beyond.Particularly if the US goes ahead with a fourth round of tariff hikes,Japan is also in line for a direct hit as a producer of high-tech components and materials in the reg