The Complicated Dance Between Trump and Markets

(Bloomberg) --

Donald Trump likes to hail record-high equity markets as validation of his economic policies. But when it comes to his trade wars, the president and the market are showing signs of a potentially unhealthy co-dependency.

With stocks off an early-July peak, a few questions arise: Could the relationship between Trump and the markets start to fog up? Might things be about to turn south?

The case for co-dependency is clear, particularly when it comes to China. When markets swoon Trump is prone to talking up the prospects of a deal. When they surge he is more likely to reach for tariffs. Which is where the relationship gets complicated. Markets tend to go up on talk of a deal and down on threats of more tariffs.

As in many tenuous relationships, there’s a third party — the Federal Reserve in this case. Chairman Jerome Powell seems ready to deploy a safety net if or when the economic damage from Trump’s trade wars builds.

Which gets us to where things stand and why Trump and the markets may be misreading each other.

Three weeks after Trump and China’s Xi Jinping agreed to resume talks, their negotiators are still working on the terms of a resumption. A face-to-face meeting between senior officials is likely in the coming weeks.

Yet any deal is months away, at best. And it’s hard to over-stress how vast the chasm between the two sides is on elemental things such as what happens to Trump’s tariffs. Markets nevertheless have reacted to the Osaka truce by hitting highs.

Meanwhile, earnings season is upon us and a growing number of companies are revealing the impact of the trade wars on their bottom line. The hawks around Trump dismiss such complaints as unnecessary hysterics, of course. They, like the president, also see the recent highs in the markets as validation.

The problem in all of this is that with any co-dependent couple, you can only misread the signals for so long before things start to get ugly.

Charting the Trade War

An awkward European Union-U.S. trade truce is held together by the prospect of a big accord. But to preserve the status quo, there’s a school of thought in Europe that hopes to slow-walk the negotiations, pushing them deeper into the 2020 U.S. presidential campaign on the expectation that Trump will be too focused on his re-election to escalate tensions with a big ally.

Today’s Must Reads

• U.S.-China talks | The two sides have been showing sincerity and goodwill recently and may meet for discussions soon, according to a blog run by a state-owned newspaper.
• South Korean slump | Asia’s fourth-largest economy, which relies on exports to generate growth, saw overseas shipments tumble in June by the most in three and a half years.
• Argentina’s exports | The South American nation’s farmers are forecast to push harvests to new highs in 2020 and rising oil production from shale fields should bolster fuel exports.
• Regional hubs | Royal Philips NV’s efforts to revamp supply chains to avoid tariffs from the U.S.-China trade dispute are paying off as the Dutch health-care firm reports healthier profits.
• Japan-Korea outlook | Economists at Goldman Sachs  and Bank of America Merrill Lynch see little chance of tensions between Tokyo and Seoul turning into a full-on trade war.

Economic Analysis

• European funk | Trade has faltered, industrial production is stumbling and factory orders are falling. 
• EU in Washington | Europe’s new director general of trade makes her first official trip to Washington.

Coming Up

• July 23: IMF updates its World Economic Outlook
• July 23-24: WTO General Council meeting
• July 25: Hong Kong trade balance, CPB monthly world trade monitor

To contact the editor responsible for this story: Brendan Murray at brmurray@bloomberg.net, Zoe Schneeweiss

©2019 Bloomberg L.P.