By Jamie McGeever

ORLANDO, Fla. (Reuters) – The extraordinary Washington-Beijing tariff battle of 2018 has been placed on ice since Donald Trump vacated the White Home, however traders are cautious of how markets reacted to the unique escalation as Sino-U.S. commerce relations return to the agenda this week.

The commerce standoff between the 2 international locations throughout Trump’s presidency noticed important monetary market dislocation that yr, together with one in every of Wall Road’s worst quarters in many years, a sustained greenback rally, and a historic fall within the .

The present financial, political and market setting, in fact, is completely different from what it was three years in the past. However the points are nonetheless in play and a few circumstances nonetheless apply.

A “Section 1” commerce deal was signed in January final yr, the publicly traded barbs between the 2 international locations are fewer and blunter, and on the face of it, Trump’s successor is a extra conciliatory presence on the worldwide stage.

However the Biden administration is leaving most of Trump’s tariffs on tons of of billions of {dollars} of Chinese language items in place, it’s holding a agency line towards China in different key areas of international coverage, and China’s property sector disaster and slowing financial system could have weakened Beijing’s hand.

Joe Biden’s prime commerce official Katherine Tai on Monday unveiled Washington’s long-awaited coverage assessment of commerce with China. It comes at a fragile juncture for monetary markets as traders grapple with rising inflation and reprice rate of interest danger.

As economists at JPMorgan (NYSE:) be aware, any perceived upside danger for markets beneath Biden on China is shortly evaporating, and U.S.-China commerce is now a “two-side wild card”.

Traders could wish to remind themselves of what occurred in 2018.

Monetary circumstances had been tightening, with the Federal Reserve in its third and last yr of a rate-hiking cycle. The federal funds goal charge vary peaked at 2.25%-2.50% that December, up from a document low 0%-0.25% within the seven years via late 2015.

As Trump upped the ante on U.S.-China commerce, the fell 14% within the fourth quarter, one in every of its worst quarters in many years. The index briefly entered a technical bear market, slumping 25% peak-to-trough, solely recovering within the final week of the yr.

The greenback started attracting safe-haven inflows earlier within the yr and surged 5% towards a basket of currencies within the April-June interval. It strengthened for the following three quarters too, marking its longest run of quarterly positive factors because the Nice Monetary Disaster of 2007-09.

The Chinese language yuan’s decline was even larger. It fell 5.2% towards the greenback within the second quarter and weakened an additional 3.6% within the third, going from round 6.25 per greenback to simply beneath 7.00.

That was, and nonetheless is, the Chinese language forex’s largest ever depreciation towards the dollar because it was launched in its present guise in 1994.

Credit score markets felt the warmth too, as world excessive yield spreads widened out 200 foundation factors to round 550 bps late that yr. The earlier widening out in spreads, a interval of even larger danger aversion, was in 2015 and in addition triggered by China-triggered jitters, this time over the yuan’s change charge.

EVERGRANDE

Might historical past repeat itself?

Trump’s “America First” commerce insurance policies sparked a tit-for-tat tariff battle that left American firms and customers paying sharply increased duties on about $370 billion in annual Chinese language imports, whereas U.S. farmers and exporters noticed gross sales to China crumble.

The Biden administration’s coverage assessment lacked specifics. However it retains most of Trump’s tariffs, and Washington has indicated it won’t pursue “Section 2” negotiations over Beijing’s state subsidies. Nor has it dominated out new tariffs to push China to satisfy its Section 1 commitments.

Biden’s worldwide political standing suffered a heavy blow from the U.S. navy’s controversial withdrawal from Afghanistan, and his home approval scores have by no means been decrease.

But Chinese language President Xi Xinping just isn’t ready of energy both because the financial system struggles to deal with a contemporary COVID outbreak, and his regulatory squeeze on the property and tech sectors.

The Evergrande disaster threatens to destabilize the true property sector, which is very leveraged and accounts for as much as 20% of China’s financial system. Progress is already slowing and will wrestle to hit Beijing’s 5.5% goal subsequent yr.

Figures from the Worldwide Institute of Finance this week confirmed that Chinese language property could now be feeling the squeeze: debt noticed the biggest outflows in six months in September, and fairness inflows had been additionally the bottom since March.

World markets are wobbling once more too. Wall Road simply had its worst month since March 2020, the greenback is hovering close to its highest degree in a yr, and excessive yield spreads are usually not removed from making new six-month peaks.

However as Stephen Jen at London-based Eurizon Capital notes, China’s renminbi could also be higher protected this time round by a a lot increased present account surplus.

“The general stability of funds place may be very supportive for the – one thing the RMB bears ought to check out earlier than they placed on brief RMB positions or urge others to brief the RMB,” Jen wrote in a be aware final week.

(By Jamie McGeever; Modifying by Andrea Ricci)