Domestic financial markets were trading relatively sideways at the end of the trading week. Then, the big news broke: Eighteen months, 13 rounds, and hundreds of tweets later and the US and Chinese governments finally reached some sort of miniature trade deal with several parts. So, after consuming a crate of Pepto Bismol and suffering a severe case of whiplash – how many reports of “Trade Deal Near” and “Trade War Escalates” have there been over the last year and a half? – the global economy might be bracing for the end to this agonizing trade dispute.
Enter Phase One
After just one day of renewed principal-level trade talks between the US and China, President Donald Trump announced that both sides have finally made their way to a new agreement. Following his meeting with Vice Premier Liu He, who led the trade delegation, the president confirmed that Beijing and Washington agreed to a substantial first phase of a deal, which could be one of several.
President Trump stated that the first phase will cover intellectual property, financial services, and agriculture. The announcement was short on the specifics, but some of the known details include China opening its markets to US banks and other financial service providers, buying up to $50 billion in US agriculture, and being more transparent with the yuan.
The agreement is in principle, but the administration anticipates that it will be written within the next three to five weeks and potentially signed during Asia-Pacific Economic Cooperation (APEC) meetings in Santiago, Chile in the middle of November. The next phase of negotiations would commence soon after.
As a result of the latest developments, Treasury Secretary Steven Mnuchin revealed that the planned tariff hikes for next week, which would rise from 25% to 30%, have been canceled. But what about the proposed levies in December that would cover just about everything China exports? For now, they’re taking a wait-and-see approach as China and the US still have a long way to go to iron out a comprehensive trade pact and reciprocate with signs of good faith.
But what may surprise analysts is that the agreement did not include Huawei, the Chinese telecommunications juggernaut. Many had believed that China would agree to the Trump administration’s proposals in exchange for laxing restrictions on Huawei, which Beijing has been trying to do for months.
Moving forward, additional work needs to be done. The next discussions will potentially surround allegations that China coerces foreign countries in handing over trade secrets in return for access to its market, industrial policy, state subsidies, and other concerns regarding currency manipulation.
For now, President Trump is ecstatic and he believes farmers, who have been decimated by the trade dispute, will see the most benefit from this development. “I mean, it’s incredible the deal for farmers. I think they’ll have to go out and buy more land and buy bigger tractors,” he said.
Running of the Bulls
Global financial markets reacted favorably to the news.
The Dow Jones Industrial Average traded as high as 500 points when the news broke, before paring those gains. At the end of the Friday trading session, the Dow finished up 320 points to 26,816. The Nasdaq climbed 106 points to 8,057 and the S&P 500 jumped more than 1% to 2,970.
Agricultural commodities also rallied to close out the trading week. November soybean futures rose $0.1075, or 1.16%, to $9.3425 per bushel. December corn futures gained $0.18, or 4.73%, to $3.9825 a pound. November wheat futures tacked on $0.165, or 3.35%, to $5.095 per bushel.
Although European and Asian markets closed before the news broke, they still soared on trade optimism, likely driven by President Trump’s tweet:
“Good things are happening at China Trade Talk Meeting. Warmer feelings than in recent past, more like the Old Days. I will be meeting with the Vice Premier today. All would like to see something significant happen!”
The German Dax soared 350 points, the London FTSE edged up 60 points, the Japanese Nikkei advanced 250 points, the Shanghai Composite tacked on 26 points, and the Hang Seng spiked 600 points.
Ultimately, this might dissipate the uncertainty, renew confidence in equities for the remainder of the year, and put the international economic slowdown on pause.
Are We There Yet?
Is the trade war over yet? Well, there is still a lot of negotiating left to do between the world’s two largest economies. Just moving beyond this first phase will not happen for another month. But the markets have been patient for the last 18 months, so what is an extra 30 days or 30 weeks? Indeed, this early harvest might give investors a sigh of relief and some certainty heading into 2020. In the end, the president should give everyone a T-shirt that reads: “I survived the trade war and all I got was this lousy tariff-free shirt.” Everyone has earned it.