US-China Trade Talks and Its’ Effects on the Stock Market - End Result!

by Ian Harvey
October 12, 2019

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US-China trade talks made significant progress, as markets were calmed amid growing hopes of a broad agreement.

President Donald Trump has announced that the US and China reached a "very substantial phase one deal" after the second day of negotiations.

China, meanwhile, said it would increase purchases of U.S. agricultural products.

Where will the stock market head from here? Find out!

Investors hopes were boosted Friday afternoon as US officials indicated that the trade war of 15 months was starting to see some semblance of abating somewhat!

The agreement averts a threatened tariff hike and covers agricultural purchases, currency and some aspects of intellectual property, adding that it will take up to five weeks to get the deal written.

As part of the deal, China has agreed to some intellectual property protections and will step up U.S. agricultural purchases. In return, the U.S. will suspend a tariff hike scheduled for October 15 on roughly $250 billion in Chinese imports. 

A Chinese state newspaper said on Friday that a "partial" trade deal would benefit China and the US - and that Washington should take the offer, reflecting Beijing's aim of ending the row before more tariffs took place.

The trade talks made a little progress on other disturbing issues, such as.....

  • China's lax protection of foreign intellectual property,
  • allegations that China forces foreign countries to hand over trade secrets in return for access to the Chinese market, and
  • Huawei, the Chinese telecom giant that has been blacklisted by the U.S.

The prospect of a trade deal has also helped calm fears of a recession that had simmered in recent months. U.S. consumer sentiment rose in early October, according to a University of Michigan survey released Friday.

Yesterday’s Stock Market…..

Friday saw major US stock indexes trading significantly higher on hopes the talks would produce some sort of a deal at the end of the day, helping the S&P 500 break a three-week losing streak.

The Dow Jones Industrial Average added 319.9 points, or 1.2%, and gained 0.9% for the week.

The S&P 500 Index was 32.1 points, or 1.1%, higher, with a 0.6% lead for the week.

Meantime, the Nasdaq Composite added on 106.3 points, or 1.3%, and was up 0.9% for the week. 

Optimism Following Trade Talks.....

Trump had tweeted earlier on Friday that "good things" were happening in the talks.

US Treasury Secretary Steven Mnuchin told reporters at the White House that "the stock market is always right" when asked “should investors be hopeful?”

Trade tensions have been a key driver of market volatility this year as investors have reacted to fresh tariffs between the two countries--and tweets from President Trump on the state of the trade talks.

In a sign of how eager investors have been for a resolution on trade, anticipation of a deal was enough to bring some investors back into stocks and push them out of traditionally safer bets like gold, the Japanese yen and Treasurys.

Pessimism from Trade Talks.....

Certain critics said Friday's move to tone down tensions is likely great for stock market investors, but expressed doubt the handshake agreement would lead to a more substantive trade deal. 

"Behind the hype, this is nothing more than [a] partial and ostensibly unsustainable deal lacking in real enforcement mechanisms. For businesses this will mean less damage, not greater certainty," Gregory Daco of Oxford Economics said in a note. 

The pessimists say the latest agreement could still fall apart, as it lacks a resolution of major issues that would create a more level playing field for U.S. companies. These include a reduction or elimination of Chinese government subsidies to local companies; cyber theft issues, IP protections for data flows and computer source codes, and addressing technology and license transfers that U.S. companies often are forced to make in China.

Warren Maruyama, a partner at the law firm Hogan Lovells and a former general counsel at the Office of the U.S. Trade Representative, describes the deal as “very preliminary.” “Markets have been extraordinarily gullible,” he says.

Rajiv Jain, chief investment officer at GQG Partners, which oversees $26.5 billion, says market gains on a minideal would likely be an opportunity to sell. Jain doesn’t see a comprehensive deal on the horizon and notes that both sides’ interests are still far apart.

Moving Forward After The Trade Talks…..

The latest trade war negotiations between China and the United States were “constructive” but there remains a great deal of uncertainty as the two sides seek to find a long-term resolution to their dispute.

A letter delivered from Chinese President Xi Jinping by Chinese Vice Premier Liu He to President Trump basically sums up the future progress. An English translation provided by the White House indicates that Xi sent his "best wishes" to the negotiations.

"A healthy and steady China-US relationship serves the interest of our two countries and the world at large," the letter states. "I hope the two sides will act in the principle and direction you and I have agreed to, and work to advance China-US relations based on coordination, cooperation and stability."

Therefore…..

It appears that there is still a long road ahead before market volatility, based around trade talks, settles down. Meantime, the past norm is likely to continue for some time yet!

Also, if you have any further insight or comments on this topic

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Best of Trading,
Ian Harvey
Director of Stock Options Made Easy


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