Good morning,
Do they or don’t they?
We have a slightly confused market this morning as the politics of trade and sitting governments trump the politics of elections for once. Most of the confusion is focused on the Trump administration’s view and stance on China following comments from Treasury Secretary Mnuchin and follow-up thoughts from President Trump.
Mnuchin’s first live interview as Treasury Secretary was a broad brush look at what he want his department to be focusing and working on; the Trump tax plan, stability of the mortgage market, a stable USD. While talking about the dollar Mnuchin said that there was no need for urgency in calling China a ‘currency manipulator’ although he would be reviewing the moves within currency markets to see whether the Chinese were benefiting from a devalued currency.
Of course, this decision contradicts one of the central edicts of the Trump campaign. While the President is keen to talk up his administration’s ability to get things done, labelling China a currency manipulator was meant to happen on day one and yet until yesterday the only real policy move on China was the decision to withdraw from the Trans-Pacific Partnership trade deal.
Clarity sought but not found
Mnuchin was vague on taxes but hinted that he would want a plan in place by August. A lot of the dollar and equity rally that has been a feature of markets since the Trump election has been predicated on a more beneficial tax regime both for individuals and businesses. As long as the belief is that those changes are coming then support, albeit weak support, will remain. Markets like Trump not for who he is – the dollar cannot be regarded as a true safe haven currency anymore given his political volatility – but for what he can do for them.
Mnuchin’s vagueness could have come from the simple fact that nothing is down on paper yet or that Trump will want the limelight as and when policy is announced. He certainly snatched the limelight away from Mnuchin by later telling reporters that China was the ‘grand champion’ of currency manipulation.
Trump meets reality on China
Labelling China a currency manipulator can be done unilaterally by the President provoking an instant 15% tariff on Chinese goods into the US for a period of 150 days. We would wager that such a measure would lead to a modicum of reprisal from Chinese authorities (sales of iPhones for example) and damage would be wrought on both economies.
Once again we have little knowledge about Trump’s willingness to doggedly pursue these reforms. He has flip-flopped upon coming to terms with reality already on issues within his reform of Obamacare and his travel ban. The dollar’s weakness probably stems from the belief that something major was to be announced yesterday and nothing emerged. Trump addresses Congress on February 28th with further detail hoped for but not expected there.
Tories increase majority in by-election
The win of the Copeland by-election by the Conservative party may allow for political focus to shift albeit slightly from Brexit for a few days although at the expense of the Labour party. By-elections are not typically market moving events and neither was this but an increase in the government’s majority will make efforts to frustrate, hinder or obfuscate the Brexit negotiations and Article 50 invocation ever more difficult.
The Day Ahead
The data calendar is quiet today however the spectre of political risk remains.
Have a great day and a better weekend.