Just when you thought that US President Donald Trump could not mismanage trade policy or his administration any further, we get Huawei's chief financial officer being detained at a Canadian airport on a US extradition request. This come on the heels of sensitive US-China relations and a temporary truce in the so-called trade war in the wake of the G20 dinner discussions in Argentina.
As expected, Beijing is furious, demanding Meng Wanzhou's release and declaring the arrest a human right violation. While Trump claims that he had no knowledge of the impending arrest when he met with China's President Xi Jinping, news has broken that John Bolton, his National Security Advisor, was aware of it. Reuters has indicated that the arrest was connected to an alleged scheme to evade US sanctions again Iran using the global banking system, which some claim is controlled by the US.
Inevitably, market reaction was extremely negative (S&P 500 suffering one of the largest single-day drops of the year) and it was saved only by rumors that the Fed might consider slowing the pace of rate hikes. Hopes that a full deal could be reached in 90 days seem like a pipe dream now. It is unlikely that the public disrespect shown by the US will be forgotten quickly. In addition, mixing business with politics is a dangerous business but one that China is well versed in. With the global growth outlook already weak, expectations for a full-blown US-China trade war will only hurt further. The US yield curve is moving from flat to negative on the short end but the trend is towards a full inverted curve indicating a US recession.
Our prediction for a weaker USD in 2019 will be supported by lower yields in the long term.