• Joel

What Postponed US/China Trade Talks Mean for Markets

The six-month review of the US/China Phase One trade deal signed back in January, which was supposed to go ahead over the weekend, has been postponed indefinitely (leaving markets feeling somewhat deflated, as this was supposed to be a key driver of price action over the coming weeks).

One might have expected that markets would have interpreted talks being postponed as a negative, and that, therefore, we ought to have seen risk off flows today.

Not the case, as talks were apparently not postponed for any negative reasons; reportedly the US just wanted to give China more time to fulfill its purchase pledges.

Indeed, in this regard, things look to be heading in the right direction.

Though China has so far bought well below its original purchase target assigned back in January, this fact has been shrugged off by both US and Chinese officials as a result of the pandemic and its associated hit to Chinese demand, not a lack of Chinese commitment to the Phase One trade deal.

Indeed, even known China hawk Navarro (a White House Advisor) today said that China are abiding by the Phase One trade deal and are keeping their word on purchases.

Of course, it is within the Trump Administrations interests to play up how well China are abiding by the trade deal, which was hailed by the President as a great victory for America. Ahead of the election, his administration will not want to give of any indications that China are not living up to the deal, and it has not turned out to be such a great victory, even if they are a little disappointed by Chinese purchases.

We had positive reports over the weekend suggesting that China will make use of the delay to the trade deal review to ramp up US oil purchases, said sources. Chinese state-owned oil firms have tentatively booked tankers to carry at least 20 million barrels of U.S. crude for August and September, the people said.

Moreover, US President Trump today said that China just made the largest order of US corn and soybeans in history and they are 'more than living up to' the Phase One deal.

Good signs, no doubt. Hence, market sentiment today has been pretty upbeat.

But beware.

China are upping purchases of US goods because they want the review to go well, but that does not mean all is well on other points of US/China tension.

Indeed, while markets have been enjoying all the “good news” on Chinese purchases of US goods, the US has also been ramping up the pressure on international Chinese tech companies; today, the US further tightened restrictions on Huawei’s ability to conduct business with US companies (such as buying US made semi-conductors).

Last week much of the focus was on the US ramping up the pressure on TikTok (owned by ByteDance).

China is of course not happy about the US hurting its national champion tech conglomerates, and was supposedly going to bring up the issue at the trade deal review that was supposed to have happened over the weekend.

The fact that the trade deal review is now indefinitely delayed does not mean China will not be bringing up this issue.

In other words, the risk that the deal could end badly is still there. This is especially true when you take into account how many other points of tension there are between the two countries (Hong Kong, South China Sea, China’s treatment of the Uighar muslims etc.).

Moving forward, US/China relation will continue to be a KEY market theme, just as they have been over the past few months.

I think the theme poses more downside risks to risk appetite than upside risks, given that, broadly speaking, relations continue to deteriorate rather than improve.

But perhaps if this Phase One trade deal review does go well, it could be another inflection point, proceeding improving relations. That would surely be a positive for risk assets such as stocks, AUD, NZD and crude oil. 



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