With the pressure building, the US and China made a show at the  deadline on those negotiations to demonstrate progress. The canary  Chinese Renminbi (CNY), which had rallied to 6.74/USD as of January 25th 2019, compared to its weakest point of 6.97/USD on October 31, 2018. By this measure, market participants are sensing that the pain is  We shall see, but equity markets may not behave well if progress to ease trade war tensions does not come to pass.


POLICY TOOLS ARE LIMITED.


Neither the US nor China is in a particularly good place in terms of using traditional policy tools to counter a trade war-induced deceleration of economic activity. For China, the main policy tool, as already discussed, is pushing new  substantially eliminated by its past success leading to diminishing returns complicated by the already high levels of debt. China has managed round one of the trade war relatively well, even if it has sustained a little more damage than the U.S. economy. China’s challenge is that if the trade war were to intensify, it will not be able to cushion its impact as well as it did in 2018.


 cut pumping up growth in 1H/2018 only to see it falter in subsequent quarters. With Democrats now running the House of Representatives, and Republicans controlling the Senate, one can be certain that any  the spectacle of a 35-day partial government shutdown, we are concerned about possible divisive wrangling over the debt ceiling, which  the August-September time frame.


 around the U.S. Federal Reserve (Fed). The Fed is trying to get interest rate policy into the “neutral gear,” while shrinking its balance sheet to reverse the past, emergency policy of quantitative easing. The Fed prides itself on being data dependent. Published economic data, however, is always backward looking – like trying to drive a car looking at  swoon in U.S. equities was a wake-up call for the Fed. Equity markets are all about forward looking expectations of corporate earnings relative to risk, and elevated risks and lowered future earnings growth estimates dominated Q4/2018 equity markets. The Fed has backtracked to a  until we see an uptick in real GDP.


Blu Putnam E: bluford.putnam@cmegroup.com


Erik Norland E: erik.norland@cmegroup.com


All examples in this report are hypothetical interpretations of situations and are used   report and the information herein should not be considered investment advice or the results of actual market experience.


30 | ADMISI - The Ghost In The Machine | January/February 2019


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