Trade Talks Continue
Risk sentiment remains surprisingly resilient this week given that US-China trade negotiations have stuttered recently.
President Trump and Chinese Premier Xi were supposed to have signed a trade deal this weekend at the APEC meeting in Chile. However, the meeting was canceled, leaving the two leaders without a venue to sign the deal.
As of last week, the countries’ leaders were looking to appoint a new venue to sign the deal. This essentially means that, for now, the deal is in limbo.
The nature of these talks remains fragile. In fact, just a few months ago, talks broke down and fresh tariffs were introduced. And yet, despite all that, traders are displaying a great deal of optimism.
Further Tariffs Threat
The US has warned China, or threatened rather, that if a deal is not done by December 15th, they will apply a further round of tariffs on $156 billion of Chinese goods.
For now, it seems the market is banking on the fact that China will want to avoid incurring further tariffs. This is especially true in light of recent data weakness showing the damage suffered by the Chinese economy.
Over the weekend, high-level officials from the two countries engaged in further talks. According to reports, these went well and have helped keep negotiations on course for a deal.
Chinese VP Liu He, China’s chief negotiator, spoke with Steve Mnuchin, the Treasury Secretary, and Robert Lighthizer, the US Trade Representative.
Following the talks, the Chinese commerce ministry released a statement saying that communications had been “constructive.” It said that they had agreed to keep in close contact ahead of signing the “phase one” deal.
Huawei Restrictions Lifted
Aside from the statements, recent actions from both sides have also been encouraging. China recently dismantled restrictions on US poultry imports. This was a gesture of good faith that the US promptly returned. The Trump administration extended a license allowing domestic firms to continue their dealings with Huawei.
The reversal of restrictions on Huawei is a significant indication of the US’ willingness to make a deal. Earlier in the year, the addition of Huawei to the Entities list (a list of Chinese companies prohibited from working with US firms) marked a severe escalation in US-China trade tensions.
Now, with Huawei allowed to deal with US firms again, relations are in much better health. Therefore, the road to a deal looks much clearer.
White House economic adviser Larry Kudlow told reporters last week “we are coming down to the short strokes” and are “in communication with them every single day.”
However, he did acknowledge that a deal was “not done yet.” For now, traders await further headlines. Though with equities well in the green today, it is clear that expectations are geared towards a deal being done soon.
The SPX500 continues to trade into fresh highs. The market has now broken above the bullish channel which has framed recent price action, reflecting an acceleration of demand. The previous highs of 2019 at 3027.92 remain the only local marker to note, offering support. While above this level, focus is on further upside.