Chart of the week: Will the ‘trade truce’ work or is it wishful thinking?

December 10, 2018

5 December 2018

Bob Cunneen, Senior Economist and Portfolio Specialist

 

Copper VS PMI* survey

Sources: Markit and London Metal Exchange

*PMI – Purchasing Managers’ Index

A truce appears to have been declared in the current US-China trade war. US President Trump and Chinese President Jinping have agreed to delay further tariff changes for another 90 days from January 2019. This is a welcome development in mitigating trade tension between the two superpowers. However there remains significant differences between the US and China over the fairness of the world trading system as well as issues of intellectual property theft and cyber security. So this truce is not yet an armistice in terms of both sides laying down their tariff weapons.

There are two key leading indicators that investors should watch to gauge the impact of this trade war. The Purchasing Managers’ Index (PMI) is an economic indicator that surveys manufacturing business conditions (blue line). Notably the average measure of PMI surveys for US, China, Europe and Japan (G4) has fallen in 2018 as trade concerns have dominated the headlines. The copper price in US dollar terms (red line) is an even more sensitive barometer. Copper is a key component for power generators, heating systems and electronics. This year has seen the copper price fall by 12% which is a worrying sign for global growth.

For investors to be more comfortable that the US and China are reconciling their differences, a convincing recovery in these PMI surveys and the copper price is needed to declare that the trade war is over.

Source: Nab assetmanagement December 2018  

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