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Positive Development on U.S.-China Trade War Front

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Pre-market futures have buoyed into positive territory — with a big 200-point rise in the Dow this morning — on news that Chinese officials say the ongoing trade war with the U.S. should be resolved at the negotiating table. Meaning reaching decisions with talks rather than running both economies into the ground is the preferred strategy for China.

That said, China remains of the belief that is was Washington DC which backed out of the most recent round of attempted agreements, and that it was the U.S. who backed away. The U.S. countered with the opposite view — that is was China who backpedaled. Secretary of State Mike Pompeo said to the “ash heap of history” for those who would misrepresent a trade deal between the two countries.

Thus, scratch the surface of this positive sentiment and it gets ugly again pretty quickly. Domestic market indexes have been down for a month, so a little value-based relief rally is understandable. But to take today’s rosier outlook as a sign that the trade deal is imminent in the near-term would likely be overplaying this hand. By all objective measures, the U.S. and China still appear far away from completing a new trade deal.

To make matters worse, we are currently six days away from 5% tariffs being slapped on all Mexican goods imported to the U.S. The Mexican foreign minister has indicated his office will be issuing a proposal tomorrow regarding how to avoid a new trade war on our southern border.

Keep in mind, also, that President Trump is prepared to raise tariffs another 5% at the first of every month until an agreement is reached. This means that by September 1st, we may see a 25% tax on Mexican goods, which would almost certainly make injury from the Chinese trade war look like a flesh wound.

One important thing to point out about Mexican imports is that roughly two-thirds are to supply components to U.S.-manufactured goods. So this would mean significant tariffs on intermediate goods for U.S. products would be heavily impacted by this new front on the global trade war. It’s tough to see a rosy outcome here, unless Mexico completely capitulates to U.S. demands regarding stopping immigrants from Latin America entering the U.S. via the Mexican border.