- Goldman Sachs doesn’t expect a trade deal before the 2020 election.
- The bank increased its Fed rate cut forecast to a total of three times in 2019 from its earlier estimate of two.
Goldman Sachs: No trade deal likely before 2020 election
According to CNBC, Goldman Sachs (GS) no longer believes that a trade deal between the US and China is possible before the 2020 US presidential election. A note published by GS analysts, led by Chief Economist Jan Hatzius, said, “News since President Trump’s tariff announcement last Thursday indicates that U.S. and Chinese policymakers are taking a harder line, and we no longer expect a trade deal before the 2020 election.”
Escalating trade war tensions
President Donald Trump once again escalated trade tensions on August 1. He tweeted that the US would levy another 10% in duties on $300 billion worth of Chinese goods starting on September 1. China vowed to retaliate. It’s since ordered its state-run enterprises to stop buying US agricultural products.
China’s yuan devaluation
In a major escalation, on August 5, the People’s Bank of China let the Chinese yuan fall below the psychological level of 7 yuan to the US dollar for the first time since 2008. After this move, the US officially labeled China as a currency manipulator. As per the BBC, the US Treasury defines “currency manipulation” as when a country influences the exchange rate between its currency and the US dollar to gain an “unfair competitive advantage in international trade.”
Markets aren’t buying Trump’s assurances
These sudden escalations on both the sides of the trade war imply that things are quickly getting out of control. After these developments, the markets saw a bloodbath.
Trump tried to calm the storm, tweeting, “Things are going along very well with China. They are paying us Tens of Billions of Dollars, made possible by their monetary devaluations and pumping in massive amounts of cash to keep their system going. So far our consumer is paying nothing – and no inflation. No help from Fed!” But the markets aren’t buying his argument that the tariffs aren’t affecting US consumers. In fact, according to a study published by the National Bureau of Economic Research, the costs of the tariff rises are largely passed on to domestic consumers and producers of foreign goods.
The S&P 500 (SPY), the Dow Jones Industrial Average (DIA), and the Nasdaq Composite (QQQ) fell close to 3% each on August 5. The markets had their worst day of the year on August 5 due to the rapid rise in trade tensions. Both countries’ strategies could have far-reaching effects, and Goldman now believes a trade deal is far off.
Protracted trade war
Another hint of a protracted trade war came when Trump tweeted yesterday that he’s ready to provide further support to US farmers as China backs out of agricultural purchases. GS’s analysts said, “While we had previously assumed that President Trump would see making a deal as more advantageous to his 2020 re-election prospects, we are now less confident that this is his view.”
In Trade War: Trump’s Advisers Think It’s a ‘Prosperity Killer,’ we talk about how Trump’s advisers want him to focus on strengthening the economy, even if he has to ease up on his trade war rhetoric. Trump, however, seems defiant in his approach to China.
Goldman and Credit Suisse share the same sentiment
China is also taking a hard-line stance. Goldman Sachs cited reports that China isn’t willing to make major concessions and is prepared to wait things out until the US presidential elections in 2020.
Goldman isn’t the only bank that thinks a trade deal is less likely now. Credit Suisse (CS) also thinks that after China’s latest currency move, there’s a lower probability of a timely trade deal.
Goldman now expects the Fed to cut rates three times
Goldman expects the Fed to cut interest rates a total of three times in 2019. According to Bloomberg, the bank wrote that the Fed is growing increasingly responsive to trade war threats, bond market expectations, and global growth concerns. It added, “In light of growing trade policy risks, market expectations for much deeper rate cuts, and an increase in global risk related to the possibility of a no-deal Brexit, we now expect a third 25-basis-point rate cut in October, for a total of 75 basis point of cuts.”
Previously, Goldman Sachs raised its year-end forecast for the S&P 500 by 3% to 3,100 and lowered its earnings estimate by $6.0.
Winners in a protracted trade war
In a protracted trade war scenario, there are few winners. Treasury bonds and gold are some of the rare winners due to flights to safety by investors. We highlighted in Gold Bucks Commodities’ Downtrend on Trade War Jitters that after the markets fell hard on rising trade tensions, gold rose to a six-year high. Among ETFs, the SPDR Gold Shares ETF (GLD) and the VanEck Vectors Gold Miners ETF (GDX) are up 4.3% and 8.2%, respectively, compared to the slides of 3.2% and 4.1% in SPY and QQQ, respectively, from July 31 to August 6.