By Greg Valliere
Horizon’s Chief Global Strategist

May 21, 2018
No Trade War; The FBI Spy; Paul Ryan Loses Control

THE FINANCIAL MARKETS CAN BREATHE easier about a trade war, as bickering Trump Administration officials backed down this weekend in talks with China. We have argued since late winter that there’s no imminent trade war – just a trade dispute, which is now on hold because the U.S. needs China to keep diplomatic and economic pressure on North Korea ahead of next month’s summit.

THE U.S. CAPITULATION THIS WEEKEND was stunning – while agreeing to put tariffs on hold, the U.S. didn’t seek any specific penalties for China’s pervasive intellectual property theft; there was no specific dollar amount cited in vague pledges of trade reforms; there were no curbs on Chinese investment in the U.S. Trade hawks are incredulous.

FOUR MAJOR IMPLICATIONS: 1. The biggest, by far, is that a trade war is not imminent. 2. China has pledged to resume – and increase – purchases of U.S. agricultural goods. 3. There will be a significant increase in Chinese purchases of U.S. energy, especially natural gas. 4. The trade protectionists – Robert Lighthizer and Peter Navarro – have suffered stinging defeats and may leave soon. Steve Mnuchin and Larry Kudlow, free traders, have prevailed.

GLOOM ON NAFTA: Not all the news on trade is market-friendly. Talks on re-writing the NAFTA pact – or approving a “skinny NAFTA” deal focusing on areas of agreement – have virtually ground to a halt; U.S. officials are now conceding that a new deal may not get ratified until 2019.

WITH A NEW POPULIST GOVERNMENT LIKELY IN MEXICO – and no resolution of steel and aluminium tariffs against Canada and Mexico – their relations with the U.S. could deteriorate further unless the “skinny NAFTA” fallback takes hold. Lighthizer is an obstacle to getting a deal, the Wall Street Journal argued in a scathing editorial this weekend.

DONALD TRUMP AND SEAN HANNITY have a bloody shirt to wave: growing evidence that there was a spy – or at least an informant – planted in the Trump campaign by U.S. intelligence officials who were alarmed by the extent of Russian involvement in the election. Talk of a spy prompted a “demand” from Trump to the Justice Department yesterday that it investigate – and sure enough, Rod Rosenstein has instructed the department to expand its probe of possible infiltration of the Trump campaign.

THIS MAY NOT BE ENOUGH to satisfy the furious president and his supporters, who want a special prosecutor to investigate this, and they want the public to learn about Stefan Halper, a Cambridge professor with tons of Washington contacts. Halper’s name has been cited by some U.S. media outlets as the “spy,” and he soon will become another character in this real-life spy novel. The impact of this will be to further muddy the Mueller probe.

PAUL RYAN, ON THIN ICE: The House Speaker hadn’t planned to leave on these terms – facing two rebellions, one from the right wing House Freedom Caucus and the other from a faction of House moderates over an immigration bill. Both sides are so bitterly dug in that they have given up, for now, on a must-pass farm bill that has been tied to immigration reform. There’s growing speculation that a government shutdown is possible on Sept. 30 if there’s no deal.

THIS IS NOT A PRETTY PICTURE for Ryan, who may leave sooner than planned amid a hail of crossfire in his own party – and this will generate further uncertainty on farm policy and immigration, hardly a plus for the GOP ahead of this fall’s elections.