Here’s what the new trade deal means for the markets

Market Insider

President Donald Trump speaks to reporters in Washington, December 7, 2019.

Erin Scott | Reuters

The trade deal agreed to by the U.S. and China diffuses tensions between the world’s two largest economies, and could help boost corporate profits and the global economy next year, analysts say.

That would be a positive for stocks and suggests that analysts may also upgrade expectations for the market in 2020.

However, policy analysts say there are still thorny issues between the two countries that will continue to be a focus and possibly a source of market volatility. Those would include national security issues, the continued clash between the U.S. and China on technology and U.S. concerns about human rights in Hong Kong and among China’s muslim population.

“The key is you are telling businesses not only tariffs are not going up, but they are going down. The biggest consequences of that is you could start to see business spending going up as confidence is coming back,” said Daniel Clifton, head of policy research at Strategas.

Stocks sold off on Friday a bit, giving up large gains early in the day after both Chinese and U.S. officials confirmed they had agreed to the perimeters for an agreement that importantly halts new tariffs and rolls back some existing tariffs. The U.S. said tariffs on $120 billion in Chinese goods will fall to 7.5%, while 25% tariffs remain on $250 billion in goods. The S&P 500 is up 0.8% for the week and 26% for the year in anticipation of a China trade truce.

‘No escalation’

The U.S., in a statement, did say the deal requires structural reforms and other changes by China in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange.

“I think the greatest news that we’re all not focused on is there’s no escalation of December 15 tariffs and escalation has come to a halt,” said Art Hogan, chief market strategist at National Securities. “We’ve literally bought the rumor and sold the news.”

Citigroup global economist Cesar Rojas said the potential de-escalation of trade tensions should be positive for encouraging animal spirits and help support the current rebound in manufacturing.

“Overall we think we have what was expected, no December tariffs,” said Rojas. “There is the potential for roll backs of tariffs once this is implemented. We have some time…basically we are kicking the can down the road.” Rojas said he is expects that national security issues will remain a point of controversy between the two, particularly as they discuss technology in the next round of talks.

Analysts have said stocks were already pricing in the promise of a trade deal. But the market was not pricing in any new tariffs, and stocks would have reacted violently had the next round of tariffs on $156 billion in Chinese goods been imposed on Sunday, as threatened. Analysts said investors were, however, disappointed that news reports the U.S. was willing to roll back a full half of all the tariffs did not pan out.

“I think we’ll wake up Monday and see a lot of things that could have gone wrong this week and didn’t. This is one of them and the U.K. election was the other. The market tends to be a little fickle in terms of how much was priced in,” said Hogan. “This is good news. We put a cap on U.S. China trade escalation.”

Light on details

Details were sparse, but China agreed to make some agricultural purchases though it did not state an amount. U.S. Trade Representative Robert Lighthizer said China may buy $40 billion in agricultural products. Officials expect to start negotiating a phase two deal shortly, and the president said tariffs will remain in place as leverage in the next round of talks.

Evercore policy strategists said the announcement was unclear on intellectual property. “While both sides mentioned this topic, we know no more today than yesterday. From our perspective, this remains largely undone business. Note, no mention of Huawei,” the strategists wrote in a note.

Tom Block, Fundstrat Washington policy strategist, said the biggest feature of the deal was that there was no further escalation. “Is this a positive? Absolutely, yes,” he said. “Is this going to be written in stone? No, because the president views unpredictability and surprise as the cornerstone of his negotiating skills. The market has to be skeptical and watch what happens with each step.”

Block also said besides Trump’s volatile nature, China and the U.S. could see friction on other issues, such as human rights.

“I don’t think we’ve resolved the human rights violations of China. Things seem to be quiet right now in Hong Kong, but if there were something on tv with students rushing into machine gun fire,” the view would change, he said.

January signing

Lighthizer said the deal could be signed in January. He said U.S. trade to China would increase by $200 billion over two years, and the trade deficit will go down as a result of the deal.

Analysts say the market had anticipated the truce in trade, and will be looking for signs that a deeper agreement will ultimately be reached on the thornier issues intellectual property and technology. But for now there are advantages in the reduction in tariffs, which were pinching costs, and created an atmosphere of uncertainty around business spending.

“What it does is remove another excuse not to do some of the things you might have held off on, like maybe raise earnings estimates and maybe get a little bold for what you think the global and U.S. economy might do,” said James Paulsen, chief market strategist at Leuthold Group.

Market strategists surveyed by CNBC expected just about a 5% increase in the S&P 500 to about 3,318 for 2020, but if earnings expectations now start to rise, those targets should also rise.

“The sentiment of people might get a lot more confident and growth rate forecasts, even from companies, as well as the Street might pickup,” said Paulsen. He said it’s a big positive that some of the trade rhetoric could now fade.

Quincy Krosby, chief market strategist at Prudential Financial, said the change in tone could be a positive for international markets as well as U.S. stocks.

“The point is if the trade war had escalated it would hurt confidence in the U.S., and it would put more pressure on the Chinese economy and ultimately perhaps the U.S. economy,” said Krosby. “The Chinese economy, as the second largest economy, helps fuel global trade. It should ease some of the pressures on China and allow the Chinese economy to start gaining some momentum and strength. It should presumably help the ability of U.S. companies to sell into the Chinese economy.”

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