Better Late Than Never
Equities markets saw a late surge last week as news of a US-China trade deal broke.
Markets had been trading with caution over the week. Many players feared that Trump would press ahead with his next round of tariffs. These were due to take effect as of Sunday, December 15th. However, late on Thursday, reports of a deal began circling, sending equities higher.
The deal in question is the phase-one trade deal agreed upon by the two sides back in October. The deal was initially due to be signed at the APEC meeting in Chile in November.
However, following the cancellation of the meeting due to civil unrest in Chile, the markets were left wondering whether a deal would be signed ahead of the December 15th tariff date.
So, What’s in the Deal?
The first details of the deal broke via a tweet from Trump, who wrote:
The deal saw Trump canceling the December 15th tariffs as well as reducing 15% tariffs on $120 billion of Chinese goods (which went live in September).
The 25% tariffs on $250 billion of Chinese goods will remain in place until a phase-two deal is complete. In return for the reduction in tariffs, China has agreed to step up its purchases of US agricultural products and has also canceled planned tariffs of its own.
Commenting further on the deal, US Trade Secretary Robert Lighthizer said that China has committed to an extra $200 billion of US agricultural, energy and manufactured goods purchases over the next two years.
The text of the deal lays out specific figures for individual items. However, these have not been released so as not to impact the commodity market.
What Has the Reaction Been?
The markets were initially firmly higher in response to the news. However, gains reversed over late trading on Friday as the market seemed to react with disappointment to the details of the deal.
Many players have said that the deal outlined is not as big as had been expected. Much of the US political community shares this view, pointing out that agricultural purchases, specifically, do not even amount to the figure of the losses suffered by US farmers last year.
As usual, Trump did his best to put a positive spin on things, telling reporters:
“I say affectionately that the farmers are going to have to go out and buy much larger tractors because it means a lot of business, a tremendous amount of business.”
Both sides are now carrying out a legal review of the text of the 86 page document before making arrangements for a formal signing of the deal.
Lighthizer and Chinese Commerce Minister Gao Feng are then due to lead their delegations in the next round of meetings. These meetings will be aimed at delivering a phase-two trade deal, in January.
The SPX500 continues to trade higher, having broken above the prior 3156.45 highs, which are holding as support for now. However, the RSI indicator is flagging bearish momentum here. With price moving within a rising wedge pattern, there is the risk of a correction lower.
To the downside, the next key level to watch is the 3092 region. While above here, medium-term focus is on a continued push higher.