Phase One: Too Much Uncertainty to Call It a ‘Good Deal’

Traders aren’t changing sentiment, per se. They are just making adjustments to the suspension of the October 15 tariffs so don’t expect too much more downside action in gold, the U.S. Dollar and Japanese Yen. All should find support at or near their September 11 levels, the day Trump announced the October 15 tariffs.
James Hyerczyk
Market Chart

It’s tough to say whether investors liked the first phase of the trade deal between the United States and China announced on Friday because of what was contained in the details, or because something was finally accomplished after months of waiting.

I have to admit, I didn’t think anything would be accomplished at the two-day meeting because I became caught up in the headlines throughout the week that seemed to be leaning toward the negative side. However, I quickly came to my senses on Thursday night when I saw the five indicator markets – Treasurys, Gold, U.S. Dollar, Japanese Yen, S&P 500 Index – starting to make noticeable moves.

When Treasurys, Gold, U.S. Dollar and Japanese Yen all started moving in the same direction, I knew something was up because this was unusual. It was especially odd seeing gold and the dollar both breaking sharply. These are the markets that investors were using to hedge risk. So when they all started to break, I sensed investors were trimming positions against the worst outcome of the trade talks.

Trump’s Flip-Flop Source of Tension

President Trump was actually the source of most of the recent tension in the markets.

On September 20, he signaled that he would consider an interim trade deal with China, even though he would not prefer it.

The president told reporters he would like to ink a full agreement with the world’s second largest economy. However, he left the door open to striking a limited deal with Beijing.

“If we’re not going to do the deal, let’s get it done,” he told reporters. “A lot of people are talking about it, I see a lot of analysts are saying an interim deal – meaning we’ll do pieces of it, the easy ones first. But there’s no easy or hard. There’s a deal or there’s not a deal. But it’s something we would consider, I guess.”

Later that day, a White House official then said the U.S. is “absolutely not” considering such a deal.

A few days later on September 24, Trump said he will not accept a “bad deal” in trade talks with China. “Hopefully we can reach an agreement that will be beneficial for both countries. But as I have made very clear I will not accept a bad deal for the American people.”

But Did Trump Make a Bad Interim Trade Deal?

No interim deal, check. Bad deal, check. Morgan Stanley says President Trump’s partial deal with China is an “uncertain” arrangement at best and there does not appear to be a viable path to reduce existing tariffs at the moment.

Without a durable dispute settlement mechanism in place, another round of tariff increases cannot be ruled out, according to Morgan Stanley.

“There is not yet a viable path to existing tariffs declining, and tariff escalation remains a meaningful risk,” the bank said in a note. “Thus, we do not yet expect a meaningful rebound in corporate behavior that would drive global growth expectations higher.”

Evercore wrote in a note, “Trump’s statement that ‘We are near the end of the trade war’ is not plausible to us. We do not expect tariff cuts in 2020 – but are ready to be favorably surprised. And as long as such punitive tariffs remain, we would describe US-China economic relations as bad, not good.”

JP Morgan said the first phase of the deal is a positive development after months of trade escalation, but that the outcome is not a surprise for the market. It expects that US-China tension could escalate again, especially during the 2020 presidential election.

“Investors had high hopes for some form of mini-deal in the weeks before the meeting, and Friday’s announcement has at least been partially, if not fully, priced in” the firm wrote.

Near-Term Expectations

Trader focus over the near-term should be on one or all of the following markets – Treasurys, Gold, U.S. Dollar, Japanese Yen and S&P 500 Index. If it proves to be too much then watch Treasury yields.

There is still risk to the economy because the initial series of tariffs still exist. Once traders trim their hedges placed in anticipation of the October 15 tariffs that have now been suspended, yields should flatten and traders will start pricing in the possibility of a Fed rate cut.

Traders aren’t changing sentiment, per se. They are just making adjustments to the suspension of the October 15 tariffs so don’t expect too much more downside action in gold, the U.S. Dollar and Japanese Yen. All should find support at or near their September 11 levels, the day Trump announced the October 15 tariffs.

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