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Malaysia: Commodity, equity markets may see ‘huge rally’
KUALA LUMPUR: A “huge rally” may be in store for commodity and equity markets should the United States and China surprise investors by sealing a trade deal, said CME Group 
senior economist and executive director Erik Norland.
“On the other hand, it is also not the end of the world, if US President Donald Trump delays the implementation of a 25% tariff on China goods while both countries return to the negotiating table. Or maybe both US and China might reach some sort of a grand deal,” he added.
Norland said at Phillip Capital’s first trading symposium in Malaysia last Thursday that huge rallies could be in store in the price of soybeans, crude oil, copper and US equity markets.
“You might also see a big sell-off in the fixed income markets.
“However, I would prefer not to follow on this trend.
“This is because the trade war never mattered much (to growth) in the first place, so who cares if it ends,” he pointed out.
Norland noted that the US-China trade dispute story had attracted a lot of attention worldwide since May last year, when Trump first imposed tariffs on China’s goods.
“Since then, this trade dispute has got enormous attention from the global news media.
“People are fascinated by the story, but if you actually do the maths, the numbers don’t add up.
“If the US places a 10% tariff on US$200bil worth of goods this is essentially a US$20bil tax.
“In Trump’s mind, this is great because China will pay for this tax wholely but in reality this is not how it works,” he said.
“In reality, actually both China and the US pays a portion of this tax.
“It will be a tax on the US consumers who buy these goods. While China probably pays about US$10bil of it in the form of reduced exports.
“The rest of it is paid by US consumers and businesses in the form of slightly higher consumer prices, and also, slightly lower corporate earnings,” he added.
Norland estimated the impact to China’s GDP last year would be about a tenth of a percent and could also drive up the US consumer prices by a number that is ‘too small to measure’, which is about three of a hundred of a percent.
“It would also lower US corporate profits by about half a percent.
“This seems broadly consistent with what had actually happened: China has slowed but by a tiny amount.
“We think that if the trade war had not happened, China’s GDP would have grown by 6.5% instead of 6.4%,” he said.
However, Norland said that the situation now with the increased tariffs would see it increased from 10% to 25% and that this would only take away one third of a percent to China’s GDP and about 1.5% away from US corporate profits and drive US consumer prices by about 0.1% higher.
“So this is also not a good thing (despite the limited impact).
“I’m not defending the trade war and I think it’s kind of dumb,” he added
Phillip Capital is an integrated financial services provider with more than 3,500 staffs and total shareholders’ funds in excess of US$2bil and offers a full range of quality and innovative financial services to retail, corporate and institutional customers.
The symposium is sponsored by Bursa Malaysia Bhd and CME Group, which are the premium sponsors. The gold sponsors are CQG Inc, Eurex Exchange, Ion Group, Singapore Exchange Ltd, Tokyo Commodity Exchange and BT Radianz.
Source: https://www.thestar.com.my/business/business-news/2019/07/01/commodity-equity-markets-may-see-huge-rally/#xHBJqih5eRV7wTvt.99