On the US/EU Trade Deal

Yesterday’s US/EU deal is great news, except that it’s really just a deal to make a deal, and it’s not really news, so we don’t expect an exuberant market reaction. It builds on negotiating dynamics we’ve been highlighting for many weeks, key among which is Trump making the optimal play of allying the US with EU to gang up on China. China may have hoped to make the same play with the EU against the US after Trump’s contentious NATO visit, but that naïve hope is dashed, so it’s game over. China’s fragility in the face of credit risks and capital flight will force it to make a deal with Trump to avoid slipping over the edge into systemic failure. It’s a positive that China’s hand is being forced this way, but in the near-term it is risky to push China to the edge. When China caves, it and the emerging markets will be the biggest beneficiary of the relief rally.