News | Question of the Week, WC 5th July
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Q: Is the Sino-U.S. Trade Truce is Good News for LatAm?
The truce in trade relations between the U.S. and China, agreed at the G20, is good news for LatAm, at least for now. The ceasefire should stop the deterioration of LatAm's economic outlook, as the threat of financial market contagion, hitting confidence and activity, has diminished. While trade talks are back on, the likelihood of broad equity sell-offs is significantly reduced. Most importantly, rising hopes that the trade war might soon end, or at least be dialled-down significantly, imply higher commodity prices, rising external demand, and better financial conditions for LatAm.
The truce already has helped to improve sentiment in commodity markets. This is particularly true of metals prices—which are dependent on the Chinese demand cycle—boding well for key economies in LatAm, particularly in the Andes. Coupled with the news of the extension of OPEC supply cuts at Monday's meeting in Vienna, this means commodity currencies—particularly the COP—should continue to do well in the near term.
Risks remain, though, and difficult issues, particularly technology and intellectual property protection, will have to be tackled at some point. These fundamental issues of the negotiation have not yet been resolved, so caution is warranted before expecting a protracted rebound in global sentiment and economic activity.
The trade truce for now also will be positive for Mexico as well as the Andean economies, thanks to its likely positive impact on global growth. Other recent developments are positive too. The threat of U.S. tariffs has gone, and Mexico’s Senate passed the USMCA last month, making it the first country to ratify the new trade pact.
Andres Abadia, Chief LatAm Economist
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Posted: 5th Jul 2019
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