What happened?

On October 11, the US and China agreed on a “Phase One” trade deal that postponed US tariff increases scheduled for October 15. In exchange, China will increase purchases of US agricultural exports – specifically pork – as it contends with an outbreak of swine flu that has resulted in massive supply strains. China also agreed to further open market access to financial services and an “almost complete” agreement on currency manipulation.

While technology was kept separate from this agreement, China has agreed to continue discussions on intellectual property. We could see some improvements on this front in the coming weeks, in light of the fact that Huawei’s current general license to do business with the US expires on November 17.

What’s the political context of the Phase One trade deal?

While the US and China remain far apart on many issues, this agreement reinforces actions China has already been taking. Both sides are likely happy with the Phase One deal and incentivized for it to serve as the start of improving trade relations.

Both President Trump and President Xi Jinping earn a political “win” in the current context. Amid evidence that business sentiment and business investment have been suffering from trade tensions, Trump is under continuing scrutiny by House impeachment proceedings – news of the deal is likely to bolster the president politically. Likewise, Xi is looking to decrease trade pressures on the Chinese economy – where growth continues to slow – without being seen as giving too many concessions in exchange.

What could happen next?

Further progress could be made on US-China trade at the mid-November Asia-Pacific Economic Cooperation summit and the late-November G20 meeting. This may include a suspension of US tariff increases scheduled to occur on December 15. While we do not expect a broad trade agreement this year, further gradual steps are likely to be a welcome reprieve for markets.

What are the investment implications?

As expected, an easing in uncertainty helped equity markets rally on the day the Phase One deal was announced. If the US-China truce lasts until the end of November, and the December tariff hike is also avoided, we should see ongoing support for markets.

The spotlight is likely to turn to the Q3 earnings season now. As earnings expectations are low, we could see better-than-expected results help markets grind higher. Market performance has been strong so far this year, but it should continue to be looked at in the context of Q4 2018’s sharp fall. As such, there is room for upside if geopolitical uncertainties ease in the coming months. Next up is Brexit – where some encouraging headlines are starting to appear.

An easing in trade tensions may also mean the Federal Reserve can wait until December to cut interest rates again, though they may want to guarantee market support with a cut now and then pause longer if the trade truce lasts.
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