US-CHINA TRADE: Why Is The Signing Of The “Phase One” Trade Deal Important?

  • What impact could today's event have on the markets?
  • Could we get more clues about the "phase two" deal?

Since Trump came to power his “make America great again” narrative sent risk capital over to the states and the protectionist trade was a dominating theme in the markets for a while. The dollar pushed higher as Trump damaged trading relationships and threatened globalisation. The US dollar became somewhat of a safe haven as their rates were higher and the data had began to improve.

His issue has always been that the US are getting a raw deal as intellectual property theft is rampant. Labour was much cheaper overseas (China) so the US stopped producing a lot of their own goods. This led to lower inflation rates and manufacturing leaving America to look for cheaper alternatives and higher profits.

His answer to all of this was to add tariffs to the nations he felt are responsible for the issues. China is the biggest issue for Trump. They also now have huge buying power in the markets and can buy US products in return. The administration then agreed not to impose tariffs last month on around $160 billion in Chinese imports which included popular consumer items such as cellphones and laptops. This was set up as part of the “phase one” agreement. Not only that, the US also reduced the tariff rate on another $112 billion worth of goods from 15% to 7.5%.

There are still 25% tariffs in place on much of the products the US buys from China and Treasury Secretary Mnuchin said the repeal could happen during the “phase two” portion of the negotiations. He then also said the 'phase two” deal will happen in stages rather than one go like the “phase one”. Any full repeal could have a positive impact on markets but as the elections are coming up he might use it as the ace up his sleeve.

Moving forward any progress is good for the stock markets. Risk appetite has increased dramatically since the 'phase one' deal was announced. The two nations are very volatile, there have been many ups and downs in this journey to this deal. The good news is this increases opportunity to find good trades. The markets have priced in the signing of this deal but the important thing to look out for is any clues to what could be happening next. The Huawei issues have been parked aside for now with the US playing hardball. The US administration has said they will not be using the company as a bargaining chip in negotiations. The S&P is trading at record levels today and it is important to keep your ear to the ground to watch out for any new developments.