The global economy has been trending lower over recent months, sparking recessionary fears across the globe.
In light of this, the markets were treated to some relief as the first signs of a potential end to the US-China trade war emerged late last week.
Representatives from both sides were engaged in the thirteenth round of negotiations last week. On the back of these talks, President Trump announced that the two sides have agreed on a “tremendous”, initial trade deal.
The official details of the deal have not yet been published. However, according to President Trump, the deal consists of a pledge from China to buy between $40 and $50 billion worth of US agricultural products.
The pledge also involves the Chinese working hard to protect US intellectual property and welcoming more foreign financial services.
In return, the US has promised to abstain from increasing 25% tariffs on $250 billion worth of Chinese goods to 30%, as was scheduled to happen on Tuesday.
Trump has dubbed the deal “phase one” and it includes a commitment to continue negotiating towards delivering a “phase two”.
This second stage of the trade deal would include commitments over more contentious issues. These include China stealing technology from foreign firms, as well as regulations that sabotage US companies.
Phase two will also include a consultation process for how to resolve disputes and handle enforcement. Trump has outlined that if talks proceed as expected, he will cancel the next wave of tariffs due to land in December.
China State Media Sounds Cautious
Despite Trump’s praise for the deal, the reaction from the Chinese has been more moderate.
Over the weekend, Chinese state newspaper the China Daily commented on the deal saying:
“While the negotiations do appear to have produced a fundamental understanding on the key issues and the broader benefits of friendly relations, the Champagne should probably be kept on ice, at least until the two presidents put pen to paper.”
The article went on to say:
“As based on its past practice, there is always the possibility that Washington may decide to cancel the deal if it thinks that doing so will better serve its interests. The US should avoid backpedaling, as it has in the past, and instead cherish what has been achieved as a manifestation of a healthy and steady China-US relationship that serves the interests of both countries and the world,”
Election Boost For Trump
The initial deal, while still just verbal at this stage, works in favor of both leaders.
Trump will likely receive a boost ahead of the 2020 elections if he critically secures farm purchases. That should help swell his support again among farmers who have been hit the hardest by the trade war.
Xi, meanwhile, has been able to avoid a further escalation in tariffs that have been crippling the Chinese economy. A deal would mean he can celebrate the start of a return to stability.
We saw some initial upside across equities markets in response to news of the deal.
The canceling of another round of tariffs is good for global trade. However, many remain skeptical.
The deal is yet to tackle any of the more important issues which have broken down relations between the US and China. Although this certainly marks the first step towards a proper deal, there is still the risk of talks faltering.
This is especially true further down the line once the US starts looking for China to compromise over some of the more contentious areas of its economic practices.
SPX500 broke above the 2959.04 highs and the local bearish trend line in reaction to the news. Despite some softening so far today, price remains above the trend line for now. While above here, focus remains on a further push higher. The resistance zone between 3020.23 and 3028.38 (all-time highs) is the key area to watch.