The European market (Stoxx-600) closed around 350.00 Wednesday, soared by almost +1.69% on a key progress in US-China trade truce; Dow also jumped almost +350 points on a report China planning greater access to US companies and drafting a replacement for its controversial “Made in China-2025” plan. The risk-on sentiment was already boosted earlier before the US session amid renewed optimism of US-China trade truce after Trump said he would intervene in the Huawei case to get a trade deal with China and was ready to meet with Xi for a second time, if necessary.
As per the China-2025 report: “China plans to replace an industrial policy savaged by the Trump administration as protectionist with a new program promising greater access for foreign companies, according to people briefed on the matter. In a move to resolve trade tensions with the U.S. China’s top planning agency and senior policy, advisers are drafting the replacement for Made in China 2025—President Xi Jinping’s blueprint to make the country a leader in high-tech industries, from robotics to information to clean-energy cars. The revised plan would play down China’s bid to dominate manufacturing and be more open to participation by foreign companies, these people said”.
This is a significant policy move and trade concession by China to allow foreign/US companies for greater access in its high techs, a key demand by Trump admin and also a key reason for the cold war rhetoric. The latest reported China concession also addressed one of Trump’s biggest complaints about the alleged inherent unfairness and anti-competitiveness of China's "Made in China 2025" policy.
The report also suggested that: "Odds that the new plan will go far enough in addressing U.S. complaints are long. If approved by President Xi, the plan could nonetheless win over some foreign businesses and persuade some in the Trump administration that Beijing is making meaningful changes to retool the economy to be more market-driven. Current plans, these people said, call for rolling out the new policy early next year, a time when the U.S. and China are expected to be accelerating negotiations for a deal to end their bruising trade battle”.
The report also said that “one of the biggest concessions would be abandoning targets for domestic content for components, something that Chinese officials are likely considering for their own economic reasons - like mitigating waste and leading to better market returns - rather than doing it purely to appease Trump. A key concession under consideration would be dropping the numerical targets for market share by Chinese companies, these people said”.
As a pointer, the Made in China 2025 sets defined goals of raising domestic content of core components and materials to 40% by 2020 and 70% by 2025, an increase that comes at the expense of foreign competitors.
Chinese officials backing the proposed changes emphasize that China needs to move away from “Made in China 2025” and state-led development for its own reasons. President Xi’s economic adviser, Vice Premier Liu He, and other senior officials have criticized “Made in China 2025” for creating waste. Cheap loans made available by various levels of government, for example, have led to extreme overcapacity among electric-vehicle battery makers in the past couple of years, making the sector less viable.
But, it's also important to note that the Chinese decision to abandon "China 2025" isn't entirely unexpected. Chinese leaders in recent months have stopped mentioning the “Made in China plan” in public remarks. At a press conference last month, President Trump took credit for China shelving the plan, saying, "China got rid of their China ’25 because I found it very insulting”.
But the Trump Admin will likely remain skeptical about the latest China concession as China may not go as far as the US would like, and thus the US might see the changes as "more cosmetic than real”. In the past, Trump has called the “Made in China 2025” policy a threat to fair competition, saying it encourages state subsidies for domestic companies and forces technology transfer from foreign partners.
Later the US skepticism about this “Made in China-2025” came true as the US Commerce Secretary Ross poured cold water and said “China has been downplaying 'Made in China 2025' plan to capture more market share in high tech industries in the US
On early Wednesday, Dow future jumped by over 300 points on optimism for the US-China trade outlook and lower USD. The CFO of Huawei Meng was eventually granted bail in Canada late Tuesday in a move that could help placate Chinese officials angered by her arrest. And President Trump said he would consider intervening in the case if it helps to get a trade deal with China or if it would serve national security interests. Trump also said trade talks were taking place with Beijing by phone and he would not raise tariffs on Chinese imports until he was sure about a deal.
Dow future was also buoyed by a fall in US dollar index (DXY) by over -0.25% on strength in GBP and EUR on the prospect of no-Brexit amid leadership challenge for the UK PM Theresa May, who is set to lose the Tory no-confidence vote and would extend the Article-50 in that scenario as the selection/election of a new UK PM will take at least Jan’19 end. The UK Prime Minster May said a leadership challenge would delay Brexit, or even risk it being canceled altogether and that she "will contest the vote with everything she has”. But if Theresa May wins the no-confidence vote, then Brexit uncertainty could linger again, which would be negative for the GBP.
UK 100
The UK’s FTSE-100 jumped by almost +1.08% to close around 6880.19 (+73.25) on hopes of a no-Brexit despite the surge in GBP. Energies also helped to some extent as oil earlier jumped after API data late Tuesday showed surprised US crude inventory drawdown.
USD was also affected by Trump’s bellicose comments about Fed rate hike next week. Trump said it would be a mistake and foolish if the Fed raises interest rates next week Trump said he needed the flexibility of lower interest rates to support the broader US economy as he fights a growing trade battle against China, and potentially other countries. USD was also undercut on hopes of a dovish Fed hike next week; i.e. only 1/2-hikes in 2019, against earlier Fed dot-plots of 3-hikes.
On late Tuesday, Trump toned down his Fed and China narrative in an interview and said that Fed’s Powell is a “great guy” and Trump may intervene in Huawei case for a China trade deal. But Trump still disagrees to Fed’s “foolish” rate hike next week. Trump also said talks between Washington and Beijing are ongoing and confirmed he would not raise tariffs on Chinese imports until he is sure that a comprehensive China trade agreement is not possible.
On a question, whether the US is headed toward a recession, Trump looked confident and said the US economy is flying like a rocket: “In my opinion, we are doing really well. Our companies are doing really well. If the Fed is going to act reasonably and rationally, I think we’ll go - I think we are a rocket ship going up”.
On the high probability of the Fed raising rates next week, Trump looked helpless and termed it as “foolish” and mocked Powell as “great”.
Trump said: “Well, I think that would be foolish but what can I say? What can I say? You know, I put a man there. What can I say? If they do that, I’d be disappointed and I think a lot of people would be disappointed. You have to understand, we’re fighting some trade battles and we’re winning. But I need accommodation, too. I think Jay (Powell) is great. I think he’s trying to do what he thinks is best. I disagree with him - I think he’s a great guy. But, I think he’s trying to get it right but I think he’s being too aggressive, far too aggressive, and actually far too aggressive”.
USDJPY is currently trading around 113.18, edged down by almost -0.18% and so far it made a session low-high of 113.15-113.52 on Wednesday.
US 500
Trump looked soft on the Huawei CFO and said on the extradition issue: “Well I think I’d want to speak to China. We’ve spoken to the Justice Department. You know – it wasn’t good what happened with the company, you understand that, in terms of what they did. And this has been a big problem that we’ve had in so many different ways with so many companies from China and from other places. So I want to see what China requests. So far they have not made that request”.
Trump said on a question, whether he would intervene in the Huawei case: “Whatever’s good for this country, I would do. If I think it’s good for the country if I think it’s good for what will be certainly the largest trade deal ever made – which is a very important thing – what’s good for national security – I would certainly intervene if I thought it was necessary”.
On trade negotiation with China, Trump said: “They’re buying tremendous amounts of soybeans. They’re back in the market ... I just heard today that they’re buying tremendous amounts of soybeans. They are starting, just starting now. We’ll probably have another meeting and maybe a meeting of the top people on both sides. If it’s necessary, I’ll have another meeting with President Xi, who I like a lot and get along with very well”.
Trump’s optimism about Chinese buying of US soybeans came true as a report shows on Wednesday that Chinese state-run firms (PSE/SOE) have bought more than 500K tons of US soybeans, worth around $180M after US-China trade truce meeting on 1st Dec at G20 in Argentina.
On other issues in the wide-ranging interview, Trump said he is open on EU/Japan auto tariffs, on a question, whether he will put tariffs on cars from Japan and the EU: “It depends on how we do with the trade negotiations. If we don’t do well, that’s one of the options that we have. We’re having very good talks with the EU and we’re having very good talks with Japan. You know those talks have already started. But that certainly is an option”.
Trump said on a question, whether the Saudi crown prince was complicit in the death of Jamal Khashoggi: “Well, I don’t want to get into that. I can say that he says no, and other people say no and some people say yes. The fact is, you know, he vehemently denies it, as you know. The crown prince vehemently denies it”.
Trump said on a question, about the further response to the death of Khashoggi: “I really hope that people aren’t going to suggest that we should not take hundreds of billions of dollars that they’re going to siphon off to Russia and to China, primarily those two, instead of giving it to us. You’re talking about hundreds of thousands of jobs. You’re talking about huge military and other contracts. I hope that’s not going to be a recommendation. But that’s moving along. And some of the senators are coming over to see me”.
On whether standing by Saudi Arabia means standing by the crown prince, Trump said: “Well, at this moment, it certainly does. He’s the leader of Saudi Arabia. They’ve been a very good ally”.
On reports that some in the Saudi royal family want change, Trump commented: “I just haven’t heard that. Honestly, I can’t comment on it because I had not heard that at all. In fact, if anything, I’ve heard that he’s very strongly in power. That’s going to be up to them. They’re going to have to make that decision”.
On ending the US involvement in Yemen, Trump added: “Well, I’m much more open to Yemen because frankly, I hate to see what’s going on in Yemen. But it takes two to tango. I’d want to see Iran pull out of Yemen too. Because – and I think they will”.
On his relationship with Democrats in Congress, Trump clarified: “We’re going to go down one of two tracks. We’re either going to start the campaign and they’re going to do presidential harassment. Or we’re going to get tremendous amounts of legislation passed working together. There’s not a third track. We’re not going to do both”.
On whether he worries about his impeachment, Trump looked quite confident and said: “It’s hard to impeach somebody who hasn’t done anything wrong and who’s created the greatest economy in the history of our country. I’m not concerned, no. I think that the people would revolt if that happened”.
On his former lawyer, Michael Cohen, and hush money payments controversy, Trump clarified: “Number one: it wasn’t a campaign contribution. If it were, it’s only civil. And even if it’s only civil, there was no violation based on what we did. And to add a fourth little tranche to it: Michael Cohen is a lawyer. He’s supposed to know what to do. That’s what you rely on people for. That’s what you pay lawyers for. Michael Cohen should have known what he was doing. I hope he did. My lawyers say frankly that everything he did was fine”.
On Wednesday, Cohen was sentenced to 3 years in prison. He told the judge he's lived in 'personal and mental incarceration' since working for Trump. As a pointer Cohen, President Trump's former personal lawyer and "fixer" had pleaded guilty to committing multiple crimes, including lying to Congress about a possible Trump business deal in Russia (Trump Tower project) and buying the silence during the 2016 presidential campaign of two women who alleged affairs with the future president.
Cohen has said he acted at Trump’s direction in paying off the women. Cohen also pleaded guilty this year to bank and tax fraud charges. Overall, Cohen implicated President Trump in a hush-money scandal and previously undisclosed Russian business link that may still threaten Trump’s presidency and ignite another wave of US political turmoil.
On whether he is looking for in a new chief of staff, Trump clarified that there is no lack of people, want to do the job for him: “Somebody that I can really get along with well, while somebody whose ideas are similar to my ideas and somebody that will take my ideas and go with them. That doesn’t mean they can’t be questioned. I like being questioned. I have at least 10, 12 - 12 people that want it badly. Everybody wants it. Who doesn’t want to be one of the top few people in Washington, D.C.?”
Finally, on his re-election campaign, Trump confirmed that he will be in the race: “I think I’ll do well with the re-election. I’m looking at polls. We had 50 yesterday in Rasmussen, right? That’s higher than Obama had, by a lot. Even Bruce Springsteen said they have nobody that’s going to beat Trump. And you know what, I listened to that - in one ear out the other - because frankly, I don’t want to be sitting here someday saying, ‘You know, I believed this.’ I don’t believe anything. All I know, I’ll work very hard. We’re doing a great job. The country’s in great shape”.
Techs are also upbeat on a report that China may liberalize its high tech sector for foreign/US companies by modifying the ‘Made in China-2025” policy. As a result, FAANG stocks are in deep green. Banks and financials like JPM, MS, Citi, and GS are all recovered on yield steepening, positive for their business/lending model.
But energies are also dragging the market as oil slips on mixed EIA report and an unexpected US crude inventory addition, in contrast with the API report released late Tuesday. Additionally, Oil also tumbled after the Iran oil minister questioned the stability of OPEC's unity- “serious political disagreements exist within OPEC" and “the OPEC meeting involved lots of arguments".
The Dow future is currently surged by +375 points, while the broader SPX-500 is currently trading around 2675, jumped by almost +1.27% and so far made session high of 2686.38 on China trade truce progress optimism and a lower USD. Overall, the market is helped by China trade sensitive industrials (Boeing (NYSE:BA), Caterpillar (NYSE:CAT)).
Note: The SPX-500 future is now trading around 2657.00, slips from the session high after the US Commerce Secretary poured cold water on the earlier “Made in China-2025” report optimism. Ross said “China has been downplaying 'Made in China 2025' plan to capture more market share in high tech industries in the US and trade agreement with China will include verification procedures, enforcement mechanisms. BMW is to benefit from China lowering tariffs on the US auto imports”.