What the markets are confronted with now are a lot of uncertainty. There are three major “Deal or No Deal” situations that are sitting there, and staring us all in the face. The first is the tariff situation with China. We are in a stand-off position and everyone is wondering if someone is going to blink and who might blink first.
President Donald Trump said on Friday that he may not impose more tariffs on China after Beijing sent the United States a list of measures it was willing to take to resolve trade tensions, although he also stated that it was unacceptable that some major items were omitted from the list. The President has imposed tariffs on $250 billion of Chinese imports to force concessions from Beijing on the list of demands that would change the terms of trade between the two countries. China has responded with import tariffs on U.S. goods. Washington is demanding Beijing improve market access and intellectual property protections for U.S. companies, cut industrial subsidies, and close the $375 billion trade gap.
The United States is turning up the heat. The U.S. tariff rate on $200 billion in Chinese goods is set to increase to 25% from 10% on January 1. The President has threatened to impose tariffs on all remaining Chinese imports, about $267 billion, if Beijing fails to address U.S. demands. The President is expected to meet Chinese President Xi Jinping on the sidelines of a G20 summit in Argentina later this month. This whole incident is one global “Game of Thrones.”
The United States will not back down from its trade dispute with China, and might even double its tariffs, unless Beijing bows to U.S. demands, Vice-President Mike Pence said on Saturday. “We have taken decisive action to address our imbalance with China. We put tariffs on $250 billion in Chinese goods, and we could more than double that number,” the Vice-President stated at the Asia Pacific Economic Co-operation (APEC) summit. He went on to state that “China has taken advantage of the United States for many years. Those days are over.”
Are you miffed or livid?
Both in Equal Measure.
– Deal or No Deal
The second “situation” is what is taking place with Brexit. This political game between Great Britain and the European Union has been going on for so long that all of the current news seems like old news, replayed over and over again. I think that many people buzz past the headlines because of the length of time it has taken for any conclusion to be reached. Well, in my opinion, we are now getting close to the end-game and so attention should be paid to what is happening, once again.
Early in December, the British Prime Minister will put her proposal to a vote in Parliament. As things stand, it’s looking increasingly likely that her plan will be rejected. If rejection is the outcome then the first option would be to leave the EU, without a deal, in March.
There are two distinct types of no-deal exits. A relatively managed no-deal in which both sides acknowledge their inability to sign off and try to minimize the chaos for businesses and people, by reaching ad-hoc side agreements in important areas like border controls and cross-border finance contracts. The alternative is an acrimonious, and very hard exit, with the UK paying no money and the EU rejecting any agreements.
The other options in this stand-off are a new general election, a second British vote on Brexit, and a new attitude undertaken at the EU, as they try to avoid disaster. It all seems very confused and muddled at this point. What is clear is that there is a lot of “Risk” on the table for both the UK and for the EU, and for their markets, which would undoubtedly affect the American ones if things unwind badly. What is going to happen here is anyone’s guess.
When we come back.
– Deal or No Deal
The third “Great Uncertainty” is what will happen with Italy. On Friday Deputy Premier and Interior Minister Matteo Salvini said that the Italian people would not accept it if the European Commission imposed penalties over the government’s budget plan for 2019. “They want to penalize us, but this will end up being more damaging to the EU than to us. They are crazy if the really do open an infringement procedure. Sixty million Italians would rise up,” Mr. Salvini stated.
The European Commission could open an infringement procedure over the budget plan, which sees Italy running a deficit of 2.4% of GDP next year, saying it breaches the Stability and Growth Pact. The initial fine could be as high as 0.2% of Italy’s $1.7 trillion GDP. If this is the path that the EU decides to take, then Dante’s Inferno may well break out on the Continent.
Recently I was quoted in Bloomberg, stating that,
I think Europe is about to find itself in a great deal of difficulty depending on what they do to Italy. It may even get to the point where Italy is going to introduce their own currency or even pull out of the European Union. There’s a likelihood depending upon how the rest of Europe responds. This could happen, yes.
Barron’s said this weekend that,
Many hope that the current standoff will be resolved by an expansive budgetary policy that is in effect throughout the Eurozone. Even if Germany and its satellites agree to implement such a policy, however, which is doubtful, it will have to be on a scale that is likely to cause an inflationary burst, currency destabilization, capital flight, and a dramatic increase in long-term interest rates… The most plausible solution to the latest impasse appears to be “Italexit” – Italy’s secession from the Eurozone. The numerous denials from leaders that this idea “is not under consideration and no such option exists” suggest, instead, that it is.
“Deals or No Deals?” Now those are the questions!
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