TRADE WAR The US-China trade war may escalate or not in 2019. Regardless, trade patterns have shifted already, with China halting purchases of U.S. soybeans and buying from Latin America. As U.S. farmers assess trade war prospects, we expect a big drop in soybean acres being planted in 2019 and an increase in corn in the US. By contrast, in Brazil, soybean acreage may well move higher. Brazil has clearly been a big winner in the US- China trade war, with soybean exports rising with double- digit year-on-year gains.


The trade war has also hit corporate profits at certain companies, especially those related to steel and aluminum. The International Monetary Fund (IMF), along with many analysts, are expecting global growth to decelerate. Emerging market currencies have suffered, and some countries have raised their interest rates to defend their currencies at the risk of slowing their growth rates.


Regarding the U.S.-China trade war, the issue of currency manipulation is rising to the forefront. The U.S. Treasury is required on a semi-annual basis to certify whether countries are seen as manipulating their currencies or not. In October 2018, the U.S. Treasury decided not to declare China a currency manipulator, despite pressure from the President to do so. In April 2019, the U.S. Treasury will again make a determination on currency manipulation, and the US may make the political decision to name China a currency manipulator. While being named a currency manipulator by the U.S. Treasury does not automatically trigger any new tariffs or trade penalties, it would be a clear signal that the trade war was entering an even more difficult phase, and it might well, unintentionally, encourage further depreciation of the Chinese Yuan.


BOTTOM LINE 2018 saw higher U.S. rates, ballooning U.S. budget deficits, an escalating U.S.-China trade war, and energy market volatility. The lagged and indirect effects of all these transformational drivers will become increasingly apparent in 2019. Our base case scenario includes the following features: • The U.S. economy will decelerate back into the 2%-plus real GDP growth zone, instead of continuing at the 3%-plus rates of 2018.


• Inflation may creep higher and remain closer to 2.5% than the Fed’s 2% target, but overall no major inflation pressures are expected despite the low unemployment rate.


• The Fed may potentially halt rate rises sooner than currently anticipated as growth decelerates and some overshooting of the 2%-inflation target is deemed acceptable. Any early halt in the Fed rate hike cycle may work to support gold prices and to hurt the U.S. dollar.


Chart 4: Price of Nearby Soybean Futures


$10.00 $10.50 $11.00


$8.00 $8.50 $9.00 $9.50


Dec-16 Jun-17 Dec-17 Source: CME Market Data, DataMine, End of Day (EOD) Files Chart 5: Chinese Yuan (CNY per USD)


$6.00 $6.20 $6.40 $6.60 $6.80 $7.00 $7.20


Source: Bloomberg Professional


Trade War Weakens Chinese Yuan


Soybeans felt the pressure from the Trade War -- Especially from decelerating demand from China


Jun-18


Dec-18


Stronger Global Growth and Exports Strengthens Currency


• Corporate earnings growth may slow into single-digit territory as the benefits of the tax cut disappear while the lagged impacts of the trade war and flat yield curve slow profit growth. The tough comparisons with 2018 will make for a more volatile equity market, especially if U.S.- China trade tensions escalate.


• Oil markets will be quite hard to analyze due to the lagged price response of U.S. shale producers, while natural gas will be driven in part by whether severe cold weather events in the US materialize, as some suspect, with the return of El Niño.


• Agricultural trade patterns shifted by the U.S.-China trade war will not reverse regardless of whether there is a trade war resolution. Instead, the shifting patterns will be reinforced by U.S. farmers planting more corn and less soybeans in 2019, while Brazil takes advantage of its expanding exports to China to increase soybean output.


Blu Putnam E: bluford.putnam@cmegroup.com


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the authors and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.


27 | ADMISI - The Ghost In The Machine | November/December 2018


CNY per USD


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