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US-China trade war – equity markets welcome gesture of goodwill

  • News out of Beijing and Washington signals the dispute between the US and China might be about to take a new, more positive direction
  • China announced it would be exempting some US anti-cancer drugs from tariffs
  • The White House reciprocated and announced a delay to the introduction of scheduled tariff hikes
  • The game of brinkmanship involves billions of dollars worth of goods and impacts the global economy — such moves have significant consequences
  • Markets welcome the change of tone, but analysts remain guarded and well understand the positivity may be only temporary in nature

Members of the US and Chinese administrations have been sharing statements which are decidedly conciliatory in nature. Addressing the tariffs that are currently coming into place, the Chinese has exempted some US products from planned levies, and the US has delayed the introduction of tariffs scheduled to apply on some Chinese goods. The US statement even took the opportunity to demonstrate at least one person in the White House has an understanding of what constitutes ‘soft’ skills. The bonhomie is reflected by the reference to the upcoming ‘National Day of the People's Republic of China’ holiday and how the US wouldn’t want to spoil that particular party. It isn’t confirmed whether initially pencilling in the start of tariffs for 1st October — the same date as the 70th birthday of the Chinese state — was an intentional act but it was certainly an aggressive one. For now at least, one of the world’s geopolitical ‘hot-spots’ has an improved outlook.

 

Market reaction

Equity markets have welcomed the news. Sentiment was already moving towards a more optimistic viewpoint. CNBC reported on Tuesday that investors have been rotating from stocks with higher price/earnings ratios to those with lower P/E ratios. (Source: CNBC)

Christian Fromhertz, CEO of The Tribeca Trade Group, was speaking earlier this week. His comments were made prior to the latest tariff announcements being released but seem to have predicted the market’s move to the upside. Speaking with CNBC he said.

“You had everyone piling into the software names because they were a great place to hide during the trade war. Now they are talking about making some strides… again, people are not optimistic for the most part on them getting anything done, but as headlines come out… there is a mad rush out of the safety areas of the market.”

Source: CNBC

In the week to date, the S&P 500 price chart shows the gap up between last week’s close on Friday 6th September and Monday’s open on the 9th. There was then a steady price rise through the week and pressure on the psychologically important 3,000 price level. The extra impetus needed for a break out to over 3,000 is provided by the news of the US-China tariff love-in.

S&P 500 Index — Five-day price chart — Weekend ‘gap’ and breakout?

Source: TradingView

S&P 500 Index — One-day price chart — 3,000 breakout?

Source: TradingView

Technical analysts have been noting bullish price action building in their charts, but the news that came out on Wednesday is what triggered the market to ‘pop’ up to the next level.

 

Small steps

The concessions came days ahead of a planned meeting aimed at de-escalating the trade war between the world’s two largest economies. This suggests to some that the important but low profile teams that are working behind the scenes are making some progress. The list of exempt and delayed items includes goods that the respective countries are searching hard to find substitutes for. These items are the ones that is it relatively easy to grant concessions on.

Source: CNBC

Wednesday saw the Chinese authorities announce that the US good that will be exempt from extra tariffs include animal feed, lubricants, fish meal and anti-cancer medication.

President Trump welcomed the actions of the Chinese administration and acknowledged by Tweet:

“I think it was a gesture, okay? But it was a big move.”

Source: Reuters

President Trump formed a quick response and on the same day wrote in a Twitter message, affirming the move as “a gesture of good will” (Source: CNBC). The United States had agreed to delay increasing tariffs on $250bn worth of Chinese imports. The delay of a fortnight means goods that were due to see import duties rise from 25% to 30% on 1st October will avoid the extra charges until 15thOctober. The hope is that the outbreak of peace might remove the threat altogether.

Notably, US soybeans and pork were not on the list. The Chinese administration is keeping the pressure on the agricultural and car manufacturing sectors, which employ US citizens who are likely to be key voters in the 2020 US presidential election.

ING’s Greater China economist, Iris Pang, wrote in a note:

“The exemption could be seen as a gesture of sincerity towards the US ahead of negotiations in October but is probably more a means of supporting the economy… There are still many uncertainties in the coming trade talks. An exemption list of just 16 items will not change China’s stance.”

Source: Reuters

Source: Reuters

The date of the next high-level talks has not been confirmed but is widely expected to take place after the ‘National Day’ holiday but before 15th October. This allows both sides the opportunity to make further conciliatory moves before the next round of measures kicks in.

 

A long road

Comments made at the turn of the year suggested a trade deal was close to being agreed but suffered from last-minute reluctance to sign off on the agreed terms. The optimism of spring 2019 now appears a distant memory — one clouded by a summer of aggressive and barbed exchanges between the involved parties. From the current standpoint, one question for the markets is how fast any positive developments might take to come to fruition? The aim is to get back to a point where both sides can secure a trade deal. The market reaction confirms that the comments of Wednesday make that more likely, but there is still a long road to travel.