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  • Trade tensions rise on multiple fronts and send stocks moderately lower
  • Chinese PMIs improve while U.S. ISM falls


Trade tensions rise on multiple fronts and send stocks moderately lower
 — Trade tensions increased substantially on multiple fronts on Monday, prompting a -0.86% sell-off in the S&P 500 index.  The main surprise was President Trump’s announcement that he was restoring tariffs on imported steel and aluminum from Brazil and Argentina because both countries “have been presiding over a massive devaluation of their currencies, which is not good for U.S. farmers.”  This is the first time that Mr. Trump has slapped tariffs on a country explicitly for currency reasons.

China has switched to buying South American ag products since China slapped retaliatory tariffs on U.S. ag products that make them uneconomical for Chinese buyers.  The sharp drop in the currencies of both Brazil and Argentina have made their ag products even cheaper for Chinese buyers, causing even more pain for U.S. farmers.

Bloomberg notes that both Brazil and Argentina have made attempts to support their currencies and that ag exports in any case are much more important to both countries than steel and aluminum.  For example, Brazil shipped $25.5 billion of farm products including soybeans and pork to China in the first 10 months of this year, which is 10 times more than the value of Brazilian steel sold to the U.S., according to Bloomberg.  Argentina has sold $2.5 billion worth of soybeans to China in the first 10 months of 2019, more than triple the amount of Argentina’s exports of aluminum and steel products to the U.S., according to Bloomberg.

On the US/China trade front, there was mostly negative news on Monday.  Axios quoted a source close to President Trump’s negotiating team as saying that the US/China trade deal “is stalled because of Hong Kong legislation” and that time is needed to allow “Xi’s domestic politics to calm.”  However, there are now only 12 days left until Dec 15 when Mr. Trump’s tariff of 15% on the last $160 billion of Chinese goods is due to go into effect.

In another negative news item, U.S. Commerce Secretary Ross on Monday told Fox News that President Trump will increase tariffs on China if the U.S. and China can’t reach a trade agreement.

There was at least a little good news on the US/Chinese trade front when China announced that it would only retaliate against America’s Nov 27 Hong Kong legislation by halting the visit of U.S. military ships to Hong Kong and sanctioning some human rights organizations.  The announcement sparked hope that the Hong Kong legislation will not derail the US/Chinese trade talks.

On US/EU trade, there was some bad news after the WTO rejected the EU’s claim that it complied with its ruling on Airbus subsidies, leading the U.S. to say that it is moving ahead with plans to slap WTO-sanctioned tariffs on $7.5 billion of EU goods.

Also on European trade, the U.S. Trade Representative’s office late Monday released its expected report on the French 3% digital tax.  The USTR proposed a retaliatory tariff on $2.4 billion of French products.  USTR Lighthizer said the U.S. may open similar digital-tax investigations against Austria, Italy, and Turkey.

On the North American trade front, Republican Senator Chuck Grassley on Monday said “I do not see how the USMCA can be ratified” in 2019 if an agreement is not reached this week.   U.S. trade officials are currently trying to get Mexico and Canada to sign off on the amendments to the USMCA that are being demanded by House Democrats as their price for ratifying the agreement.  Mexico’s lead negotiator last Friday said that a USMCA deal still needs work but that a deal could be reached as soon as this week.

Chinese PMIs improve while U.S. ISM falls — There is still some November service-sector PMI data left to report, but the PMI data released thus far suggests that the Chinese economy may be stabilizing while the U.S. manufacturing sector is mired in a recession.

Last Friday night’s China Nov national manufacturing PMI rose by +0.9 to 50.2, which was substantially stronger than expectations of +0.2 to 49.5 and put the index back above the expansion-contraction level of 50.0 for the first time in 7 months.  China’s Nov national non-manufacturing index rose by +1.6 to 54.4, substantially stronger than expectations of +0.3 to 53.1.  Sunday night’s Nov Caixin China manufacturing PMI rose by +0.1 to 51.8, stronger than expectations for a -0.2 point decline to 51.5.

By contrast, Monday’s Nov U.S. ISM manufacturing index fell by -0.2 points to 48.1, which was substantially weaker than expectations of +0.9 to 49.2.  The ISM index is now only 0.3 points above September’s 10-year low of 47.8 and has been in contractionary territory below 50.0 for the last four months (Aug-Nov).   Monday’s ISM report provided further confirmation that the U.S. manufacturing sector is mired in a recession.  U.S. manufacturing production fell by -1.5% y/y in October and has been in negative year-on-year territory for the past four months (July-Oct).

There is still some service-sector PMI data to be released this week.  Tonight’s China Nov Caixin services PMI is expected to show a small +0.1 point increase to 51.2 after Oct’s -0.2 point decline to 51.1.

Meanwhile, Wednesday’s Nov U.S. ISM non-manufacturing index is expected to show a -0.2 point decline to 54.5, giving back a little of Oct’s strong increase of +2.1 points to 54.7.  The Oct index level of 54.7 is comfortably above the expansion-contraction level of 50.0, illustrating that most U.S. economic sectors other than manufacturing are in solid shape.

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