The Finance 202: Stock market high threatens to send Trump the wrong message on China

Arguably one of the worst things that could happen to the stock market just did: It closed at a record high.

The S&P 500 climbed 0.9 percent to close at 2954.18, its first new high since April, while the Dow Jones industrial average surged a similar amount to come within 0.3 percent of its all-time high. Stocks appeared to be rallying on news out of this week’s Fed meeting that the central bank is primed to cut interest rates to protect an economic expansion menaced by, among other things, President Trump’s trade war.

But a surging market and a newly dovish Fed might be unwittingly conspiring to intensify Trump’s trade confrontation with China. That’s because, armed with the confidence that stocks are rising and the Fed is moving his way, the president will feel less pressure to negotiate a cease-fire when he meets with Chinese President Xi Jinping on the sidelines of the G-20 summit in Osaka, Japan, next week.
And he took a victory lap of sorts over the news the Fed looks ready to cut its benchmark interest rate later this year, saying he was encouraged by what he saw. “They should have done it sooner, but what are you going to do?” he told reporters Thursday.

The twin developments spell bad news for investors, business interests and others rooting for the administration to settle its trade hostilities with Beijing — or at least put them on pause before imposing 25 percent tariffs on the remaining $300 billion in Chinese imports, which Trump has threatened barring major concessions from Xi.

“Both Trump and Xi feel they’re in the stronger position, which doesn’t usually get you to a deal,” says Bill Reinsch, a trade expert at the Center for Strategic and International Studies. “Trump believes he’s in an economically stronger position at home, and we’re hurting them more than they’re hurting us. Xi knows he doesn’t have to have an election, and we do. And he probably thinks Trump needs a victory on trade, because he doesn’t have many, despite making it a signature issue, and probably feels Trump will not go to the next tranche of tariffs because of the terrible consumer impact it would have.”

Other trade watchers are similarly bearish about prospects for a breakthrough in Japan. “Both presidents are under pressure to get a deal, but both are under pressure to get a good deal,” Doug Barry of the U.S.-China Business Council writes in an email. “So at this point we have building pressure but no clarity on when and how it will be released.”

Or as Bloomberg Economics chief economist Tom Orlik writes, after noting the market and Fed moves reduce pressure on Trump to make a deal, “At the same time, the incentives for Trump, who officially launched his reelection bid this week, to stand tough on China are rising. The lesson of past presidential elections is that bashing Beijing is a vote-winning strategy with few downsides, politically speaking. By contrast, the concessions required to get a deal done would open up Trump to criticism that he’d gone soft at the last minute.”
And at least one White House adviser on China issues said a tariff escalation may be necessary. Michael Pillsbury, a Hudson Institute senior fellow who consults with the administration, gave even odds to the two sides agreeing to restart talks next week. But in a Monday appearance on Fox Business, he said, “I’m afraid the president may need to go to the full 25 percent on all Chinese exports to America, because they just seem to feel the pain in China in a subjective sense. They should. But they just don’t see it that way.”

Investors evidently appraise the situation differently.

“Trade tensions and uncertainty over central-bank policy had rattled investors last month, with stocks posting their worst May since 2010,” The Wall Street Journal’s Jessica Menton writes. “But the potential for thawing trade relations between Washington and Beijing has helped lift share prices this month, putting the S&P 500 on pace for its best June since 1955.”

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