The rollercoaster ride of the US-China trade negotiations took another turn yesterday. US equities jumped on news that the US is planning to delay the next round of tariffs.
The US was planning to activate a fresh round of 15% tariffs on $156 billion worth of Chinese goods if no deal is signed by December 15th.
Despite reports saying that talks remained in good health over recent weeks, the market was growing fearful that a deal would not be completed in time. With the prospect of fresh US tariffs also came the fear that China would retaliate. This would likely result in a breakdown in the talks.
However, on Tuesday, the Wall Street Journal reported sources close to the talks as saying that the two sides are working to agree on postponing the tariffs.
When questioned last week on whether the US would be going ahead with the tariffs, Trump quickly changed the subject. He claimed that he would “have to see” and that he didn’t want to talk about it.
“Laying The Groundwork”
However, just days ahead of the December 15th deadline, the Wall Street Journal has reported that negotiators are in talks to “lay the groundwork” to delay the tariffs.
The delay is not yet certain, nor do we know for how long it is being considered. However, the market has so far reacted with optimism, and US equities futures are higher.
Last week, equities recovered from an even deeper correction. This came on the back of news that China was increasing its purchases of some US pork and soybean products as a show of good faith amidst the negotiations.
The US has been asking China to step up its purchases. So, traders are hopeful that this latest move will help the two sides deliver the phase-one trade deal still yet to be signed.
US Pressing For Quarterly Chinese Spending Review
A part of the deal, the US is insisting on a quarterly review of Chinese purchases of US agricultural products. This is to ensure that China maintains the quote agreed upon.
China, meanwhile, is still insisting that the US remove the existing tariffs in place. It is this final demand which continues to be the biggest issue. The US is adamant that it will not remove tariffs.
However, China did announce last week that it will remove tariffs on some US agricultural products. It also stepped up purchases, as we mentioned. So, the market is hopeful that the US will be willing to compromise.
Trade Negotiations To Impact FOMC
The Fed will be closely watching the ongoing trade negotiations as it meets today. The central bank has struggled with the negative impact of the trade war all year.
In October, at the last rate cut, there was a strong hope that a deal would be in place ahead of this meeting. However, with a deal yet to be signed, the Fed is likely to once again lament the risks posed by the ongoing protectionist policies of the US government.
We don’t expect the Fed to cut rates this week. But, it will likely reiterate its message that it stands ready to ease further, if needed, as judged by the strength of incoming data.
The SPX500 recovered strongly off the 3115.44 level support yesterday, to trade back up above the 3132.56 level. While above here, focus is on a move back up to test the current record highs around 3155.79. The SPX500 has been higher by around 25% this year. And, despite the recent pause in upside momentum, focus is on further upside.