18.01.

2019 The Finance 202: Investors leap at signs of China trade breakthrough - The Washington Post
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The Finance 202: Investors leap at signs of China trade

breakthrough

By Tory Newmyer
THE TICKER

Treasury Secretary Steven Mnuchin and stock market investors appear desperate for the
same thing.

Yet investors relearned Thursday that trade peace with China is still easier claimed than
secured.

The lesson came via a meta moment: Markets spiked after the Wall Street Journal reported Mnuchin is
pushing to ratchet back tariffs on Chinese imports, in part to oblige markets.

But the former Goldman Sachs executive is running into predictable resistance from U.S. Trade
Representative Robert Lighthizer — a fact laid out in the third paragraph of the Journal story. In a mini-
rally that lasted all of 13 minutes, the Dow Jones industrial average surged more than 1
percent. The index gave back most of those gains almost as fast, then drifted back up to close
up about .6 percent on the day.

“People have been looking for a reason to continue to buy the market,” says Brian Belski, chief
investment strategist at BMO Capital Markets. “This has been a doubted rally. People have been waiting for
some sort of news out of China.”

Indeed, the Dow has gained nearly 12 percent since it bottomed out the day before Christmas. But it is
down nearly 6 percent since Trump and Chinese President Xi Jinping agreed in early
December to open a 90-day negotiation aimed at averting new trade hostilities. Investors still
look to be pricing in a belief those talks won’t produce a ceasefire in time to head off a major escalation in
tariff rates, from 10 to 25 percent, on March 1.

“From our standpoint, we think a deal is going to get done sooner rather than later. We need some good
news out of China, especially with the government shutdown,” Belski says. But the market broadly is
still in a “fire, aim, ready cycle of investing … It speaks to the behavior on Wall Street, that nobody
wants to miss anything. This reactive buying and selling is troublesome.”

It could also help secure a trade deal, to the extent it demonstrates to President Trump that
markets remain highly sensitive to trade war headlines — and ready to rally on any evidence
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of a breakthrough.

From AEI’s Jim Pethokoukis:

There’s still no evidence of concrete progress in the U.S.-China talks. “In past China discussions,
Mr. Trump has sided with Mr. Lighthizer on tariffs, rather than Mr. Mnuchin. But this time, the president
has made clear he wants a deal—and is pressing Mr. Lighthizer to deliver one, according to people familiar
with the discussions,” the Journal’s Bob Davis and Lingling Wei reported. A senior administration
official told CNBC, however, that “there's no discussion of lifting tariffs now,” and a Treasury
spokesman said the talks are “nowhere near completion."

And some questioned the logic of the Trump administration loosening screws it applied to force major
reforms from the Chinese before they have agreed to anything.

From Matthew Klein, of Barrons:

From longtime China watcher Bill Bishop:

From Silvercrest Asset Management chief strategist Patrick Chovanec:

Investors eager for a deal did see one solid development yesterday. China’s economic czar, Vice
Premiere Liu He, will be heading to Washington for talks with Lighthizer on Jan.30 and 31.

That type of engagement suggests a new level of seriousness. It also means both sides will be digging into
some of the tougher issues still dividing them, including U.S. demands that Beijing back off support for
intellectual property theft and other abusive trade practices.

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TRUMP TRACKER

MELTDOWN WATCH:

— BUZZFEED BOMBSHELL: Trump reportedly directed Cohen to lie to Congress:

"Trump directed his longtime attorney Michael Cohen to lie to Congress about negotiations to build a
Trump Tower in Moscow, according to two federal law enforcement officials involved in an investigation of
the matter," Jason Leopold and Anthony Cormier of the site report. "Trump also supported a plan, set up by
Cohen, to visit Russia during the presidential campaign, in order to personally meet President Vladimir
Putin and jump-start the tower negotiations. 'Make it happen,' the sources said Trump told Cohen."

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Mueller already knew: "The special counsel’s office learned about Trump’s directive for Cohen to lie to
Congress through interviews with multiple witnesses from the Trump Organization and internal company
emails, text messages, and a cache of other documents. Cohen then acknowledged those instructions during
his interviews with that office."

Mulitple Congressional Democrats are already pledging to investigate — and possibly

move to impeach Trump — as a result.

From Rep. Joaquin Castro (D-Texas), who serves on the House Judiciary Committee, which would take the
lead on impeachment:

From House Intelligence Committee Chairman Adam Schiff (D-Calif.)

From Sen. Chris Murphy (D-Conn.):

"Rudy Giuliani backs off remarks on potential collusion by Trump aides." NYT's Eileen Sullivan and Maggie Haberman.
"Rudy Giuliani just contradicted nearly all the Trump team’s past collusion denials." The Post's Aaron Blake.
"This quiet Mueller cooperator has a key role in Trump probe." Bloomberg's Shannon Pettypiece.
"Cohen hired IT firm to rig early CNBC, Drudge polls to favor Trump." WSJ's Michael Rothfeld, Rob Barry and Joe Palazzolo.
“Law firm to pay $4.6 million in case tied to Manafort and Ukraine.” NYT’s Ken
Vogel and Matthew Goldstein.

MONEY ON THE HILL

— Trump, Pelosi standoff deepens as shutdown grinds on. The Post's Damian Paletta and Josh
Dawsey: "The State Department ordered its employees to return to work next week, saying it has found
money to cover a half-month in salary, as the Trump administration continued to grapple with a federal
shutdown that shows no sign of ending. The unexpected yet temporary move came on a day when the White
House and congressional Democrats halted even the pretense of negotiations.

"The political acrimony between [Trump] and Democratic leaders reached new levels, worrying members of
both parties that the chance of a near-term resolution has moved far out of reach. Trump on Thursday sent
Pelosi a letter informing her he was canceling her imminent flight to visit U.S. troops in Afghanistan. This
came one day after Pelosi suggested that Trump postpone his State of the Union address or present it in
written form."

Trump cancels Davos delegation. More from The Post: "Facing his own questions about plans to send a
delegation of top officials to Davos, Switzerland, next week for the World Economic Forum, Trump late
Thursday announced he would scrap the trip '[o]ut of consideration for the 800,000 great American
workers not receiving pay.' Trump himself dropped out of the conference earlier this month but had
planned to send top officials, including [Mnuchin] and Secretary of State Mike Pompeo."

Chaos continues to spread. "The political standoff is leading to turmoil throughout the federal
government, in thousands of households and in pockets of the economy, prompting frantic calls from
families and business groups looking for short-term assistance. The TSA acknowledged Thursday that the
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lengthy shutdown had affected its employees’ ability to come to work, with many calling in sick... And some
agencies have had to deal with small-scale rebellions among the employees they are requiring to continue
showing up for work."

— Mnuchin declines to testify. Reuters: "Mnuchin on Thursday declined a request by the Democratic
chairman of the U.S. House of Representatives tax committee to testify next week about the partial
government shutdown’s impact on the upcoming federal tax filing season. In a letter to House Ways and
Means Committee Chairman Richard Neal, the Treasury Department offered to send senior officials 'who
are most knowledgeable' about the department’s plans during the shutdown."

Next week's New Yorker cover:

Gridlock

Metro is losing $400,000 a day during shutdown,

agency says
The agency detailed the impact of the federal government shutdown in a
letter to the region's U.S. senators. Average daily ridership is down 16
percent; Metrobus ridership is down 8 percent, General Manager Paul J.
Wiedefeld said.
Faiz Siddiqui
MARKET MOVERS

— Shutdown starts to rattle investors. Bloomberg’s Reade Pickert: “A growing group of analysts and
investors is warning that the U.S. government shutdown could soon hurt stocks. Already confronting an
increase in volatility, an uncertain outlook for interest rates and a trade war that threatens to damp global
growth, traders now have to factor in the economic effects of the partial closure… There are already some
nascent signs of market impact from the shutdown, with an index of airline shares underperforming broader
gauges amid concerns that slowdowns in airport screenings will hurt demand for tickets.”

Economic expectations now singing the shutdown blues. Bloomberg’s Chibuike Oguh: “U.S.
consumers this month were the most downbeat on the economy since November 2016, a third straight drop
after expectations reached a 16-year high just three months earlier, as the partial government shutdown
wears on toward a fourth week. The Bloomberg Consumer Comfort Index’s monthly expectations gauge fell
for a third month to 44.5 in January as more respondents said the U.S. economy is getting worse, according
to a report on Thursday. Meanwhile, the weekly comfort measure declined to a four-month low of 58.1 as
sentiment on the buying climate fell to its lowest since November.”

— Morgan Stanley’s rough quarter raises eyebrows. CNBC’s Hugh Son: Banks’ trading desks ended
2018 with a whimper – and nowhere as much as at Morgan Stanley. The New York-based firm had the worst
bond trading performance among the big five Wall Street investment banks, a precipitous 30 percent
decline to $564 million. It was one of the most meager hauls since Morgan Stanley revamped the struggling
business at the end of 2015, prompting a flurry of questions from analysts. … After the 2008 crisis reordered
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the banking world, Wall Street firms sought to reduce the volatility of results across trading and advisory
businesses. Goldman Sachs and Morgan Stanley, where trading still makes up a bigger slice of revenue than
peers, have sought new sources of revenue in consumer banking or wealth management. But the sharp
declines in December showed that, while they’ve made progress, banks are still exposed to the whims of the
market.

— May makes no progress on Brexit. FT's Jim Pickard and co.: "Theresa May’s talks with opposition
parties about a Brexit plan B descended into acrimony on Thursday after she told MPs she could not make
substantial changes to her existing plan despite it being overwhelmingly rejected by the Commons. Smaller
opposition parties who attended talks with Mrs May were left bewildered after Downing Street made clear it
would resist demands to shift towards a softer form of Brexit following MPs’ emphatic vote against her
withdrawal agreement on Tuesday. Following a separate defeat at the hands of MPs this month, Mrs May is
obliged to outline a Brexit plan B on Monday, but a Commons vote on it will not take place until January 29
— two months before the UK is scheduled to leave the EU."

‘Bear Market’ Is an Arbitrary Label, but Using It Can Hurt

Popular definitions for “bear markets” aren’t scientifically based, the economist Robert Shiller says, yet they can
contribute to downward spirals.
Robert Shiller, in the NYT
TRADE FLY-AROUND:

— China’s soybean slowdown is bad news for American farmers. CNBC’s Tom DiChristopher:
“China’s soybean imports in the opening weeks of 2019 have plunged from recent years, raising concerns for
American farmers who were hoping that a trade deal would offer swift relief. Soybean shipments offloaded
in China this year are down about 37 percent from the first two weeks of 2018, according to tanker-tracking
firm ClipperData. To be sure, a couple weeks of data represent a small sample size, but the drop is very
concerning in light of market conditions and trade tensions … The faltering imports are a major red flag for
demand. Meanwhile, the world’s top three soybean suppliers — the United States, Brazil and Argentina —
have all produced sizable crops.”

— No, China isn’t “paying” Trump’s tariffs. Bloomberg’s Mark Niquette: “Trump is right to say that
his tariffs are generating billions of dollars for the U.S. But China and other countries aren’t paying them as
he’s suggested. … more than $13 billion in duties imposed by the Trump administration were assessed on
imported goods as of Dec. 18. Actual collections could lag and be lower because of refunds and other factors,
but Treasury Department reports show receipts from all customs duties have risen sharply since the tariffs
took effect. While Trump has suggested on Twitter and in public comments that tariffs are somehow being
charged to or paid by China and other countries, trade economists say that’s generally misleading. U.S.
importers of record are responsible for the duties, and ultimately U.S. businesses and consumers could pay
through higher costs.”

— Tariffs forcing hard choices onto U.S. auto suppliers. Nick Carey at Reuters: “Bob Roth makes no
bones about his feelings towards U.S. manufacturing. … His procurement team has been under long-
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standing orders to source all parts and materials as near as possible to his western Michigan factory, even
with [Trump’s] tariffs on steel and aluminum. But with those tariffs dragging into a new year and steel
comprising a quarter of RoMan’s fixed costs, Roth says his company has now begun the lengthy process of
switching from its U.S. suppliers to an Israeli company for a key component for its products. It is a strategic
decision that RoMan and other auto suppliers have put off since the tariffs kicked in last spring. With tariffs
firmly part of the landscape, some are now starting to shift their own supply chain to keep costs in check.”

POCKET CHANGE

— Moonves to fight for his $120 million severance. WSJ’s Joe Flint: “Former CBS Corp. head Leslie
Moonves is challenging the company’s decision last month to deny him a severance package of $120 million,
CBS said Thursday, a move that will further prolong a monthslong drama at the media conglomerate. Mr.
Moonves, who was forced to resign as chairman and chief executive amid accusations of sexual harassment
in September, was denied his severance after a CBS board investigation concluded that he had violated
company policies, breached his employment contract and intentionally failed to fully cooperate with the
investigation. The terms of his exit agreement from CBS allow Mr. Moonves to challenge the board’s
decision in arbitration.”

— Elizabeth Warren: Kick Wells Fargo off campuses. Bloomberg's Hannah Levitt: "Elizabeth
Warren is demanding that Wells Fargo & Co. be kicked off college campuses, a market the bank has said is
among its fastest-growing. The Democratic senator from Massachusetts and likely presidential candidate
said Thursday that she requested more information from Wells Fargo Chief Executive Officer Tim Sloan and
from 31 colleges where the bank does business. The inquiry follows a Consumer Financial Protection Bureau
report said that Wells Fargo charged students the highest fees of 573 banks examined.

— Malaysia could drop charges against Goldman for $7.5 billion. Bloomberg's Anisah Sukry: "An
apology from Goldman Sachs Group Inc. doesn’t cut it for Malaysia, which said it may consider a discussion
to absolve the bank of blame for its role in the 1MDB scandal for $7.5 billion. The country filed criminal
charges against the lender in December, the first for Goldman, and may discuss dropping those allegations if
the bank pays the sum, Finance Minister Lim Guan Eng told reporters on Friday. Units of the bank were
accused of making false statements in documents submitted to a local regulator in arranging $6.5 billion
bond offers for troubled state fund 1MDB.

— Americans are drinking less beer. Now, Molson is making kombucha. WSJ’s Saabira
Chaudhuri and Jennifer Maloney: “Americans are increasingly laying off the booze, prompting the world’s
biggest brewers and liquor companies to push beyond their traditional fare and roll out teas, energy drinks
and nonalcoholic spirits. New data show that U.S. alcohol volumes dropped 0.8% last year, slightly steeper
than the 0.7% decline in 2017. Beer was worst hit, with volumes down 1.5% in 2018, compared with a 1.1%
decline in 2017, while growth in wine and spirits slowed ... The fall in alcohol volumes reflects ‘a growing
trend toward mindful drinking or complete abstinence, particularly among the millennial cohort’ ... In
response to the slowdown, alcohol makers are trying to diversify. Molson Coors Brewing Co. has turned to
kombucha, Budweiser brewer Anheuser-Busch InBev sells a spiked coconut water, and Smirnoff maker
Diageo PLC wants teetotalers to start mixing cocktails with a pricey, alcohol-free gin alternative.”
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DAYBOOK

COMING SOON:

The Bipartisan Policy Center looks at "The Year Ahead for Capital Markets" on Jan. 22 in Washington.
The Heritage Foundation hosts "Taxing Wars: The American Way of War Finance And the Decline of Democracy" in Washington on
Jan. 28.

THE FUNNIES

— From The New Yorker's Hilary Fitzgerald Campbell

BULL SESSION

Schiff compares Trump to 5th grader after cancelling congressional trip

Is $5.7 billion a lot of money? Not in terms of federal spending.

'Our country is in a hellhole right now': Cardi B calls out Trump over shutdown

Tory Newmyer
Tory Newmyer covers economic policy and the intersection of Wall Street and Washington as the anchor of PowerPost's
daily tipsheet The Finance 202. He previously worked at Fortune, where he spent seven years as the magazine's
Washington correspondent. Follow 

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