European stock markets have given up some of Friday’s gains as the investment community casts a more discerning eye over last week’s reports of a US and China trade deal. During the first hours of Monday’s session, the FTSE 100 index was trading 1.11% higher than it was last Monday. The DAX index is up 3.7% over the same five-day period, but on an intra-day basis, both opened Monday’s session trading in the red. The FTSE is down -0.41% at 7,217 and DAX is down -0.53% at 12,446.
FTSE 100 (TVC:UK100) — five-day price chart — 7th – 14th October:
DAX Index (XETRA:DAX) — five-day price chart — 7th – 14th October:
The early reports coming out of those at the meeting on Friday spurred the markets to higher ground. At one point, the Dow Jones Industrial Average (DJIA) traded over 2% higher on hopes that the brakes were about to be taken off global trade. As the end of the US session neared, stocks gave up some of their gains, yet still ended up positive on the day.
Positive outcomes from the US-China talks include the suspension of additional tariffs, which were due to come into place on Tuesday. US customs was set to increase tariffs by 25% to 30% on $250bn worth of Chinese goods. These proposed hikes are now off the table. In return, the Chinese administration has agreed to buy $40bn–$50bn of US agricultural produce.
Reports from the Chinese side suggest there was some additional agreement on a wide range of areas. Top of the list are the key concerns — agriculture, technology transfers and intellectual property protection. There was also progress made on financial services, exchange rates, expanding trade cooperation and dispute settlement. However, there was little detail forthcoming, and the agreements made on Friday have yet to be set into an agreed text. Scott Kennedy, a China trade expert at the Center for Strategic and International Studies in Washington, spoke with CNBC and said:
“If they couldn’t agree on a text, that must mean they’re not done. Wishing an agreement does not one make. This isn’t a skinny deal. It’s an invisible one.”
Both sides are happy to confirm the existence of these quick wins, which are being dubbed ‘Phase 1’. The question for some is what ‘Phase 2’, ‘Phase 3’ or ‘Phase 4’ might bring and when. For others, and significantly the Chinese administration itself, the question is how reliable ‘Phase 1’ actually is.
The Chinese-distributed English language paper the China Daily is very much the mouthpiece of the Chinese government. Over the weekend, the editorial section of the state-owned news agency shared a more downbeat analysis of the situation:
“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.”
Source: China Daily
The editorial section went on to warn the US to “avoid backpedaling” (Source: China Daily). Indeed, should the implementation stage of the process throw up negative surprises, the concern is whether or not US deal-makers would willingly scrap ‘Phase 1’ altogether.
The next steps were described by the US as being “beyond tariffs” (Source: China Daily).It is the case that both parties need to address issues such as the blacklisting of certain Chinese tech firms, student visas and other areas of international relations. More pressing are the tariffs that are still in place and still set to be introduced. Tariffs from September were not rolled back as a result of last week’s meeting, and the set of duties due to come into place on 15th December are still in the shared diary. The tariffs are the manifestation of the US’s long-held objection to a transfer of technological superiority to China — an issue that will take more than two days to resolve.
Dow Jones Industrial Average (TVC:DJI) — five-day price chart — 7th – 14th October:
Analysts are trying to establish if the glass is half full or half empty. Some positive results have come out of the talks, and the immediate reaction by the markets reflects how dissatisfying previous summits have been.
President Trump noted that progress from the talks came from the deal being “a big deal, covering so much territory” (Source: whitehouse.gov).“Cooperation” was the key factor in the talks for China’s vice premier Liu He (Source: Twitter).
The mechanics of the de-escalation process may explain the state of play. US officials are still smarting from the proposed agreement of April 2019 failing when China apparently walked away from a sweeping agreement at the last minute. The capacity to remove the discussed tariffs falls within the remit of the White House. The embattled president’s ability to pull those particular policy levers without having to gain support from the Democrat-led Congress makes it easier for him to take action at a time that suits him.
Trump and Liu He have put through some quick wins, but it appears the rest of the agreement will be treated as a whole. With regards to the latter, the reaction of the European markets on Monday shows that this may be harder to realise.